Figuring Your Return

Successful investing is usually the result of making educated decisions and taking calculated risks. Nothing brings the winning potential of that combination into clearer focus than evaluating the return, or reward, of your portfolio in periods of strong market performance. Of course, when you invest, there's also the possibility that your return may be disappointing, especially during a downturn in the markets. Your reaction to those results is likely to be less euphoric.

Total return, or the amount your investment increases or decreases in value, plus the income it pays, is the most accurate measure of an individual stock, bond, or mutual fund performance.

Using total return, you can evaluate an investment's comparative performance by calculating percentage return, or total return divided by initial cost. And since the most accurate comparisons are on a yearly basis, you can find the annual percentage return by dividing the percentage return by the number of years you've owned the investment.

Remember, though, that comparing returns, which is a way to decide which investments to keep and which to sell, works best if you compare similar investments or investments with similar goals.

For example, if you compare the total return of one small-company stock fund with another fund investing in the same kinds of companies, you can tell which fund is performing better. The same is true for two bond funds, or other investments of the same type. You may also want to compare the results for individual stocks with the results for one or more mutual funds investing in similar stocks or to an index fund that tracks the performance of a defined group of stocks.

comparing returns chart
* Hypothetical example for illustration only, and not based on the return of any specific investment.

COMPARING RETURNS Figuring out the actual return on your investments can be difficult. And you can't expect to compare the performance of different kinds of investments solely on their return. Here are some of the reasons:
	The amount and make-up of your investment changes. Most investment portfolios are active, with money moving in and out.
	The time you hold specific investments varies. When you buy or sell can have a dramatic effect on your overall return. For example, buying just before a big gain or a big drop often has long-term consequences.
	The return on some investments — like real estate, zero coupon bonds, and limited partnerships — is difficult to pin down, partly because they're more difficult to liquidate easily. You have to evaluate them by different standards, including their tax advantages.
	The method of computing return on different investments may vary. For example, performance can be averaged or compounded, which changes the rate of return dramatically.

KEEPING UP TO DATE
You don't have to wait until you sell an investment to get a sense of the kind of return you're getting. If you're tracking a stock's performance, total return isn't reported in the press, but you can use the current price of the stock and your purchase and dividend records to estimate your unrealized gain or loss. (It's unrealized because you still own the stock. When you sell, you realize the gain or loss.) Then, use the formula below, just as you would if you'd sold.

* Hypothetical example for illustration only, and not based on the return of any specific investment.

HOW MUCH IS ENOUGH?
How much return do investors expect? One explanation seems to be that investors demand returns on their equity investments that beat the yields on long-term government bonds. Investors have traditionally paid more for stocks as the interest rate dropped than they would when bond yields were high. But other factors, including how they feel about the state of the economy and the country in general, also affect investor decisions.

MUTUAL FUND PERFORMANCE
If you're tracking mutual fund performance, you can find updated information on every fund's total return — which includes dividends and increases in value — monthly, quarterly, and annually in the financial pages of your newspaper, in financial magazines, and more frequently online at the company's Web site or other financial services sites.

Your financial adviser, the brokerage firm where you have an account, or your mutual fund company may also include information on the return of various investments in your portfolio in their monthly, quarterly, or annual reports. If they don't provide what you want to know, you can ask for it.

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