What is Total Return and Why Should You Care?
Ever wonder how much you've truly earned from an investment? That's where understanding total return comes in handy. Total return is the comprehensive measure of the total value generated by your investment over a certain period. It accounts not just for the change in the asset's price, but also for the extra earnings like dividends.
So, why should you care? Knowing your total return helps you evaluate whether an investment has been worth it. It allows you to make smarter financial decisions, compare different investments, and ultimately, maximize your wealth. This isn't just for finance nerds – it's crucial for anyone wanting to grow their money effectively!
How to Calculate Total Return
Calculating total return is simple with the following formula:
[\text{Total Return} = (\text{Closing Value} - \text{Opening Value}) + \text{Earnings}]
Where:
- Total Return is the dollar amount of profit or loss.
- Closing Value is the final value of the investment.
- Opening Value is the initial value when you started the investment.
- Earnings are any additional gains such as dividends or interest.
Let's break this down into manageable steps:
- Identify the Closing Value: This is the value of the investment at the end of the period.
- Identify the Opening Value: This is the value of the investment at the beginning of the period.
- Calculate Earnings: Include all earnings such as dividends, interests, or any other profits.
- Apply the formula: Plug the numbers into our handy formula above.
Calculation Example
Let's see how this works with an example.
- Determine the Closing Value: Let's say your investment is now worth $10,000.
- Determine the Opening Value: You initially invested $7,500.
- Determine the Earnings: Over the investment period, you received $200 in dividends.
Apply the total return formula:
[\text{Total Return} = (\text{Closing Value} - \text{Opening Value}) + \text{Earnings}]
Substitute the values:
[\text{Total Return} = (10000 - 7500) + 200 = 2700]
So, your total return is $2,700.
Why it Matters
Knowing the total return gives you the real picture of your investment's performance. It's not just about how much the stock price went up or down; it's about the complete value you've gained. This helps you:
- Evaluate Performance: Compare your investments to see which gives better returns.
- Plan for the Future: Make informed decisions based on past performance.
- Sleep Better: Knowing you're in control of your finances can give you peace of mind.