Total Return

  

Categories: Investing, Metrics

See: Return. See: Rate on Return.

The financial press so easily ignores dividends and other side-element financial events that affect stock prices. You'll hear a lot of noise about the 1970s as having been "a lost decade" for investors, as the Dow or the S&P was "about the same price" in 1980 as it was in 1970.

But what about dividends? They were massive, by today's standards. They went from 4% to 6% to 8% to 9%...and, had you reinvested those divvys in the purchase of more stock, well, by 1990 or 2000, you'd have done seriously well.

So Total Return calculations take into account not just the compounding of the underlying index, but also the dividends and occasional other cash distributions that "come from nowhere"...like if a private company inside of a public market portfolio is sold for cash and that cash is distributed back out to investors, etc.

Makes the calculations more complex, but few investors are complaining.

Related or Semi-related Video

Finance: How Do You Calculate Rates of R...35 Views

00:00

finance - a la shmoop how do you calculate rates of return? well invest a dollar get

00:08

more than a dollar back right? well yeah you hope so anyway in in finance land [dollar bill on table]

00:13

and Wall Street and any other professional gig. well rates of return

00:17

from financial investments are generally stated as annual returns, so calculating

00:23

a rate of return revolves around the one year at a time thing. there are a ton of

00:29

curveballs that get thrown into these calculations. here's a big one,

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dividends. well guess what clueless financial journalists with little to no [dividends defined]

00:37

real schooling in finance quote stock market returns all the time. let's say

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that shares in random example industries traded at the same price at the

00:46

beginning of the 1970s as they did at the end of the decade. prices for random

00:51

example industries were totally flat from 1970 to 1980. that's what one of

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those journalists might say. and they don't even get fired for making such a [man reports news]

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narrow statement .no nothing happened at all. and wrong. had they taken this course

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they'd have realized that monster-sized dividends were paid out during that time

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period. five six seven eight percent a year, each year. yet the journalists

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ignored them when they stated that the stock market was in fact flat for a

01:18

decade and maybe shares of that company were also flat for a decade. but it

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implied that they got no return from their investment which is absolutely [icons of stock market and a stock deflate]

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wrong. did readers get their money back for that bad journalistic work? yeah we

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doubt it - well what about zero coupon bonds? that is their bonds that pay no

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dividends or interest along the way and they sell at a discount to par. what does

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that mean? that is $1,000 par value bond pays you a grand in seven years. well how

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do you calculate the annualized rates of return there? well today that bond sells

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for six hundred forty two dollars. like you buy it today for six hundred forty

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two you get a thousand bucks in seven years. well what's the rate of return on [zero coupon bond rates of return listed]

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that bond? hmm. well vanilla bonds like these we're a whole lot easier to

02:04

calculate. because like you got the interest rate right there on the thingy.

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yeah so the question is really what interest rate will accrue and then

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compound for this bond such that in exactly seven years you get a thousand

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bucks? well if it compounded at ten percent a year the compounding would

02:20

look like this. you see the table right there and whoa we've already passed the

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grand way ahead of seven years. so the compound rate must be less than ten

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percent right well what if it compounded at five percent a year well then the [compound rate listed]

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rates of return would look like this and basically we're just multiplying 1.0

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five times a 6.2 and we take that compound totally multiply 1.05 again and

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so on and so on. much closer .well here's the formula you'll want to remember.

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where f is the face value PV is the present value and n is the number of

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periods. well in our example the face values a thousand bucks, the present

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value is 642 dollars and the number of periods is the number of years or seven

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years. all right well then we just you know put our handy-dandy calculator to [mathematical formula shown]

03:08

work and get a yield of well right around here. so here's the key idea rates

03:14

of return are an annual thing when quoted among finance professionals. among

03:20

fun dance professionals well and maybe a different story. [three stooges pictured]

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