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Total Return is the complete measure of an investment's performance that combines both capital appreciation (or depreciation) and income received. Unlike looking at price movements alone, Total Return provides investors with the full picture of how their investment has performed by including all sources of return - both the changes in the asset's price and any distributions such as dividends or interest payments.
Understanding Total Return is crucial because focusing solely on price movements can lead to misguided investment decisions, potentially causing investors to sell profitable positions based on incomplete information.
Total Return is essential for making informed investment decisions for several reasons:
The basic formula for Total Return is:
Total Return = (End Price - Start Price + Income Received) ÷ Start Price × 100%
Let's look at two real-world examples:
Example 1: The 5% Gain That Looks Like a Loss
While the share price shows a 5% loss, the Total Return is actually a 5% gain when including the dividend payment.
Many investors fall into these common traps when evaluating their investments:
Understanding Total Return is crucial for various types of investors:
When assessing investment performance, consider these key points:
Understanding Total Return may lead to better investment decisions by:
Put simply, Total Return is a true measure of investment performance. While share prices may fluctuate and charts may show declines, understanding Total Return helps investors make better-informed decisions and avoid selling profitable positions based on incomplete information.
ASR Wealth Advisers’ research team use these principles to identify attractive investment opportunities for investors. Download our free report: Top 3 Income and Dividend Stocks
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