Total Return

What It Means & How to Calculate It

What does the total return approach to investing mean? Investing can be a complex process, but its foundations are surprisingly simple. The most common draw behind investing is its potential for individuals to place their money in an investment that will increase over time, providing what’s known as a return on investment— an increase on the money initially invested.

The calculation for return on investment is also straightforward— it’s determined by dividing the profit earned by the cost of the investment itself. If you invest $100 and your return is $300, you would divide $300 by $100, which would leave you with a 3x ROI, or 300%.

Total Return

But return on an investment isn’t always this simple or unambiguous, especially when talking about a concept known as total return. Here’s what you should know about the total return approach to investing, and why it offers a more comprehensive look at your investment performance.

What is Total Return?

Total return is a term used to describe the combined amount of all returns an investment produced, whether those were from dividends, interest, appreciation or depreciation of the asset (capital appreciation/depreciation). It is a way of measuring the total performance of an investment over a period of time. The total return of an investment includes both the capital gains and the income that it generates. As a strategy, the total return approach involves producing the highest possible return on investment.

To put it simply, total return = (ending value – starting value) + earnings in that period.

Total Return Formula

Basically, to calculate total return you need to know the starting value of the investment, the ending value of the investment, and any dividends, interest payments, appreciation, or depreciation that were made during the time period. The resulting value can be positive or negative, depending on whether the asset increased or decreased in value.

Factors to consider when calculating a total return

Other factors considered to be part of total return include capital gains, income from dividends and interest payments, as well as any appreciation or depreciation in the value of the asset. When considering an investment, it is important to look at total return in order to get a complete picture of how the investment has performed over time.

Total Return Cost Basis

When you invest in an asset using the total return strategy, you establish a cost basis. This is the original price or starting value you paid for the investment, plus any commissions or fees associated with the purchase. The cost basis is important because it is used to determine your capital gain or loss when you sell the security.


Here are two examples of total return calculations in the real world, one resulting in a winning return and the other resulting in a losing return.

Winning Total Return Calculation

Consider an asset that costs $100 and pays $5 in annual dividends. If the asset’s price increases by 10% over the course of a year, then the total return would be 15%. When evaluating total return, it is also important to take into account the time frame over which the returns are being calculated. For example, a total return of 15% over one year may seem impressive, but it would be much less so if the asset had lost 10% of its value over the previous five years.

Losing Total Return Calculation

Let’s say you invested $10,000 in a stock that pays annual dividends of $500. After one year, the stock is worth $11,000. Your total return would be 15% (($11,000+$500)/$10,000)-1). However, if the stock price fell to $9,500 at the end of the year, your total return would be -5% (($9,500+$500)/$10,000)-1).

Why Choose a Total Return Investment Strategy?

A total return investment strategy aims to provide investors with a steady stream of income, as well as the opportunity for long-term capital appreciation. By reinvesting dividends and distributions back into the underlying security, investors can compound their gains and increase their overall returns. This approach can be especially beneficial for those looking to take dividends and other distributions and use that income for other purposes, such as living expenses or selling shares.

By reinvesting these payments, investors can minimize their tax liability and maximize the growth of their portfolios. In addition, a total return investment strategy provides investors with greater flexibility when it comes to managing their portfolios. For example, if an investor needs to sell shares to cover a large expense, they can do so without incurring any capital gains taxes.

As a result, a total return investment strategy can be an excellent way to grow your portfolio while still being able to take advantage of distribution payments.

What Does a Total Return Index Tell Us?

A total return index is a type of financial index that measures the performance of an investment by taking into account both the price appreciation or depreciation of the investment and any income generated from it, such as dividends or interest payments.

Total Return Index Definition

The total return of an investment is often expressed as a percentage. For example, if an investment has a total return of 10%, that means that over the course of one year, the investment has increased in value by 10% and has also generated 10% in income. Total return indexes are used by investors to track the performance of specific investments or groups of investments, and they can be used to compare the performance of different investments over time. While total return indexes do not provide a perfect measure of an investment’s performance, they can give investors a good sense of how an investment is doing relative to other investments.

The components of the index are typically weighted according to their market capitalization. The largest companies in the index have the greatest impact on the overall performance of the index. For example, the S&P 500 Index is a total return index that tracks the performance of 500 large-cap companies in the United States. The companies in the index are weighted by their market capitalization.

A Powerful Approach to Investing

Overall, total return is a more complete way of looking at the performance of an investment. This approach considers both capital appreciation and income, while the income approach focuses solely on generating income. It is an approach that is also typically more tax-efficient, since it takes into account capital gains taxes.

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