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Total Return

AN INVESTMENT’S performance often has two components: the capital gain or loss and the income generated. For instance, one of your stocks might gain in price, while also paying you a quarterly dividend. Similarly, mutual fund owners need to consider not only share price changes, but also the income and capital gains distributions that they receive throughout the year.

By combining an investment’s price change and the income it generated, you can calculate the investment’s total return. Often, investors will make rough-and-ready calculations. An example: If the S&P 500-stock index gains 7% during the year and also pays a 2% dividend, you might estimate the total return at 9%. While this is accurate enough for most purposes, it won’t be the precise result. For that, you would need to know when dividends were paid and at what price investors were able to reinvest this money.

Fortunately, many financial firms provide this data. For instance, you can find total returns for mutual funds both from individual fund company websites and from Morningstar.com.

A caveat: When comparing the five-year total returns on, say, two mutual funds, make sure you’re looking at the same five-year period for both funds. A fund’s five-year record through June 30 can differ radically from its results through March 31 if, for instance, there was a big bear market five years ago and that loss disappears from the record when you look at the more recent five-year period.

Next: Gordon Equation

Previous: Nominal vs. Real

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