Simple Investing Return
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
'Return' is the fundamental measure of investment performance

Are you sure you understand 'interest'?

Income return
If you deposit £100 for a year at 6% interest you will get £106 back. This is your 100 deposit (' principal') and 6 of interest ('income').

You might look on the 100 as an investment - putting money away to get more back in the future. The 6 could then be called the 'return on the investment', or, in short, a '6% return'. It is also a 6% income return.

Capital return
If you buy a gold coin for 100 and sell it a year later for 106 you have again made a 6% return. This time you have made this money through capital appreciation. So it is called a 'capital return'. But it's 6 just the same.

Total return
If you invest 100 in a share and it pays a dividend of 3 and also goes up in value to 105 you have made a total of 8. Cleverly, this is called the 'total return', or just 'return'. As an investor, you do not care about the separate capital and income returns (except for tax reasons). You just care about your total return.

Get used to adding your income return (or 'interest' or 'yield' or 'dividend') to your capital return (or 'capital gain') to get your total return. In the example, 3% + 5% = 8% total return.

Multi-year returns
If your 100 goes to 108 in year 1 and to 118.80 in year 2, a bit of maths tells you that you made 8% in year 1 and 10% in year 2. (10% of £108 is £10.80).

There's a way of reducing this information to a single 'annualised return' or 'annual return'. In this example you have made a return of 18.8% over 2 years. This is equivalent to 9.0% per annum compounded (not 9.4%, which would be simple interest). If you want to understand the maths (which is not necessary). You would refer to your investment as making an 'annual return of 9%'.

As you may guess, it is possible to calculate an annual return from any old mish-mash of cash flows over any period. Look in any investment textbook for 'Internal Rate of Return (IRR)'.

All other things being equal, you want the highest possible returns from your investments.

Learn about 'Compounding' now:  

 

 

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