What is a Total Return?

Total return is the actual rate of return that is realized from a single investment, a group of investments, or all investments contained in a single portfolio. All types of income generated from those investments are taken into consideration. This includes dividends paid on stocks, interest paid on bond issues and other types of interest-bearing investments, any capital gains that are realized, and any other income distribution that is connected with the investments under consideration.

Measuring total return is extremely important when it comes to determining the effectiveness of an investor’s current strategy. By accounting for all types of total returns connected with a given investment, it is possible to decide if acquiring the investment was a good idea. The investor can also take the data and determine if the rate of return is within the general expectations of the investor, and if the security should be held onto for a longer period of time. As a management tool, calculating the total return empowers the investor to make changes when and as necessary, continually improving the overall performance of his or her investments.

Calculating the total return on groups of investments within a portfolio is also helpful, in that the process helps to identify areas where some improvement is needed in order optimize the portfolio’s return. For example, by considering the gains and losses made with stocks in the portfolio overall make it possible to decide if some stocks should be sold, while others are held. This approach helps to position the investor for increasing the rate of return in upcoming periods.

When it comes to evaluating the total return on a portfolio, the goal is to measure the overall return generated from all assets in the portfolio, and make sure that the value of the portfolio is actually increasing from one period to the next. If that is not the case, taking the time to look at both the performance of individual holdings as well as groups of holdings within the portfolio will quickly identify the weak areas and allow the investor to engage in trades that correct the situation. It is not unusual for an investor to look first at the total return of the portfolio, then drill down to the groups and finally the individual investments if the returns are not up to his or her expectations.

It is important to note that when an investment or group of investments does generate a lower total return in one specific time period, that does not necessarily mean that it’s time to sell. As many investors know, a number of factors can temporarily have a negative impact on the performance of any type of investment. For this reason, it is often helpful to identify the reason for the decline, determine if the situation will exist for an extended period of time, then decide whether to hold or to sell. If the reason behind the change is of short duration, there is a good chance that the value of the security will level off and then begin to climb back to a favorable level by the next period.