Investment Returns: What They Are and How They Work

Investment return refers to the gain or loss generated by an investment over a particular period. Returns can come from changes in investment value, income payments or a combination of both.

What Is an Investment Return?

An investment return measures how the value of an investment has changed over time. A return may be positive when an investment gains value or generates income, but it may also be negative when the investment loses value.

Where Can Investment Returns Come From?

Depending on the type of investment, returns may come from one or more sources.

• Changes in the market value of an investment.
• Interest payments.
• Dividend payments.
• Other distributions or income.

Capital Gains and Capital Losses

A capital gain may occur when an investment is sold for more than its purchase price. A capital loss may occur when an investment is sold for less than its purchase price.

The value of an investment can also change before it is sold. These changes may affect the current value of a portfolio.

Income Returns

Some investments may generate income, such as interest or dividends. The amount and timing of income can vary depending on the investment and its underlying terms or performance.

Income payments are not guaranteed unless specifically stated under the terms of a particular investment.

Total Return

Total return generally considers both changes in investment value and income received from the investment.

Nominal Return and Real Return

A nominal return reflects the change in an investment without adjusting for inflation. A real return considers the effect of inflation on purchasing power.

For example, an investment may show a positive nominal return while inflation reduces the purchasing power of the money over the same period.

Why Time Matters When Measuring Returns

Investment returns can look different depending on the period being measured. A return over one month may differ significantly from a return measured over several years.

Comparing investments may therefore require considering the time period, investment risk, costs and the method used to calculate returns.

Returns and Investment Risk

Investment returns are uncertain. Past performance does not guarantee future results, and investments can experience gains or losses.

Taking greater investment risk does not guarantee higher returns. Different investments can have different potential outcomes and levels of uncertainty.

Factors That Can Affect Investment Returns

• Market conditions.
• Economic developments.
• Interest rates.
• Inflation.
• Company or issuer performance.
• Investment costs and fees.
• Taxes, where applicable.
• The time period over which an investment is held.

Common Mistakes to Avoid

• Assuming past returns will continue in the future.
• Looking only at gains without considering losses and risk.
• Ignoring inflation and purchasing power.
• Ignoring investment costs and fees.
• Comparing returns from different time periods without context.
• Assuming a positive return is guaranteed.

Key Takeaways

• Investment returns can include gains, losses and income.
• Total return may include both changes in value and investment income.
• Returns can vary depending on the time period measured.
• Inflation, costs and taxes may affect financial outcomes.
• Past performance does not guarantee future investment results.