How to measure your portfolio’s total return
By Michael Morris 10 January 2024 3 min read
While every investor has their own unique goals, they ultimately share a common aim—to earn a positive return and grow their portfolio. But how do you know if your portfolio is actually meeting your goals? There are many ways to track the growth or return on your investments with varying degrees of complexity. To truly understand how your investments have performed, measuring the total return over a given period of time will provide a clear picture of your portfolio’s strength.The total return of an investment considers all of the different components that make up an investment's returns. It is an important metric to understand when evaluating your portfolio or considering new investments.
Components of total return
The total return of an investment is made up of capital appreciation plus any income (cash flow) received. Income from investments can come in the form of dividends from stocks and interest income in the form of coupon payments from bonds.
Capital appreciation: the rise in value of an investment
Interest income: coupon payments from bonds or interest earned from cash
Dividends: cash distribution of a company’s earnings or past profits to shareholders. As the dividend is paid from a company, the value of the company will theoretically be worth ‘less’ and the share price will subsequently decline by the per-share amount of the dividend.
Distributions: mutual funds and exchange-traded funds can include a variety of different underlying securities such as stocks and bonds, which will accumulate income such as dividends, interest and realized capital gains and pay them out to unitholders in the form of a distribution. The unit value of a fund will also decline after a distribution similar to a share in a company after a dividend.
The different sources of return all carry unique tax treatment, which is another consideration for those investing outside of registered accounts such as Tax-Free Savings Accounts (TFSAs) and Registered Retirement Savings Plans (RRSPs). While you can determine total return based on information in your statements, working with a financial advisor can help you understand how your investments are performing based on all of the components and tax implications that make up total return.
Total return investing
Investors sometimes focus solely on a certain component of return. Some may consider only the price performance of an investment which may appear underwhelming in isolation. Alternatively, investors may overemphasize the yield of an investment—that is, its measure of income (usually dividends) divided by its price. A high yield can look appealing at first glance but often it doesn’t tell the whole story. If the asset's price is declining by more than the cash flow from the dividend or distribution, it's losing money. Using total return when evaluating an investment allows an investor to paint a complete picture of how their investment has performed over a given period.
To illustrate an example of total return, let's consider the chart below for the S&P/TSX Composite Index, which represents the largest Canadian stocks by market capitalization. This chart illustrates both the price return of the index (how much have the cumulative stock prices increased) as well as the total return, which captures the dividends paid by the companies in the index, and subsequently, reinvested.
Price return versus total return - S&P/TSX Composite
You’ll notice that over the past 10 years, the price return has increased a total of roughly 54 per cent over the past 10 years or 4.4 per cent a year annualized. When dividends and reinvestment of these dividends are considered, this increases to a total return of 108 per cent or 7.6 percent annualized over the same period.
Investors seek positive returns and portfolio growth, and should look at total return as a key metric for assessment. While investors may be inclined to focus on specific components like price performance or yield, a total return perspective offers a comprehensive evaluation of investment performance over time. Having an understanding and appreciation for the total return will allow investors to make more informed decisions in regards to their investments and contribute to a more accurate assessment of their investment success.
ATB Wealth® (a registered trade name) consists of a range of financial services provided by ATB Financial and certain of its subsidiaries. ATB Investment Management Inc., and ATB Securities Inc. are individually licensed users of ATB Wealth. ATB Securities Inc. is a member of the Canadian Investor Protection Fund and the Canadian Investment Regulatory Organization.
The information contained herein has been compiled or arrived at from sources believed to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy or completeness, and ATB Wealth (this includes all the above legal entities) does not accept any liability or responsibility whatsoever for any loss arising from any use of this document or its contents. This information is subject to change and ATB Wealth does not undertake to provide updated information should a change occur. This document may not be reproduced in whole or in part, or referred to in any manner whatsoever, nor may the information, opinions and conclusions contained in it be referred to without the prior consent of the appropriate legal entity using ATB Wealth. This document is being provided for information purposes only and is not intended to replace or serve as a substitute for professional advice, nor as an offer to sell or a solicitation of an offer to buy any investment. Professional legal and tax advice should always be obtained when dealing with legal and taxation issues as each individual’s situation is different.