We all invest money hoping to make a profit. But before you are able to calculate how much you have gained, you need to understand what a total investment return is. (By the way, it is possible to also lose on your investment).
To determine what your total return is, you need to figure out how much money you had originally placed in the investment and figure in the interest, dividends, and other components into the equation. When you invest in stocks or bonds, you will want to determine how much your stock has appreciated or depreciated since the first time you bought it. To do this, subtract the value of your original investment from the current value of the stock and divide the answer by the value of the original investment. The answer will be expressed in percentage. So if you invested $20,000 a couple of years ago and the value of your investment is now $21,000, the appreciation is 5 percent.
Calculating how much your stock has appreciated also means including the dividends that the company has paid out to you when it turned a profit. So to calculate your total return with dividends included, you just have to follow the above-mentioned formula but add the dividends before dividing the total figure by the original investment. Let’s say that the company paid out $200 in dividends to all stockholders, your equation is going to be: ($21,000-$20,000) + $200/$20,000 = 0.06. Your total return is then 6 percent.
Take note, however, that this is not going to be your entire return. You still have taxes to think about. Depending on what your tax bracket is, you can expect the Federal and state governments to have a portion of it. This is why you should consider the tax implications of your investments as well.
How do the different types of investment vehicles measure up against the risk you’re taking when you invest in them? Generally, the lower the risk, the lower the returns. The riskier the investments, the higher the returns are going to be.
Investments that have very low risk and correspondingly very low potential returns include savings accounts, checking accounts, certificates of deposit and money market deposit accounts. Next in the risk ladder are fixed annuities, government agency securities, high quality short- and intermediate-term municipal and corporate bonds and bond funds, money market mutual funds, treasury bills and notes, certain U.S. savings bonds, and variable annuities invested in high-quality bond sub-accounts. The investment returns are also low, although these generate a higher return than those classified as very low risk investments.
Investments that hold a moderate amount of risk and potential returns include convertible bonds, high-yield (junk) bond funds, large-cap stocks and funds, S&P 500 & Wilshire 5000 stock index funds, and variable annuities invested in large-cap stock sub-accounts. The highest returns can be expected from the most volatile types of investment vehicles. These include aggressive growth funds; emerging markets mutual funds; foreign company stocks, global, international, sector, and precious metal mutual funds; penny stocks; small cap stocks and funds; and variable annuities invested in aggressive growth sub-accounts.
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