The investing world thrives on intimidating everyday people.
To maintain its mystique, the industry too often uses jargon instead of plain language (equities, not stocks; volatility, instead of the risk of losing money). And numbers as basic as those used in published investment returns are often left vague. Are we looking at total or nominal returns? Net returns, or gross? Here's an investment return cheat sheet to help you make sense of your own results, and those of the funds you own.
Nominal returns: Reflects the price change of an investment before fees and taxes; this is the default for showing the returns of stocks and stock indexes.
Real returns: After inflation
Total return: Includes changes in price plus dividends, interest payments and any other income; this is the preferred way to measure the results of individual portfolios, funds and stock indexes. If you're using a total return for an investment or portfolio, be sure to compare to a total return stock index.
Fund Returns: Returns for mutual funds and exchange-traded funds are generally shown on a total return basis.
The impact of fees: Mutual fund or ETF returns are published on an after-fee basis. Add the fund's management expense ratio and trading expense ratio to get an idea of the gross return. MERs reflect the cost of running a fund plus taxes, while TERs show the cost of trading commissions for managing investments in the fund.
MERs and TERs: Both can be found in the Fund Facts document available for all mutual funds; just Google a fund's name + fund facts.
Annual versus cumulative returns: Investment returns are generally shown on a compound average annual basis. Cumulative returns should be specified as such.
Timeframes: Be sure you're comparing returns for various indexes, investments etc. over the same timeframe; returns are updated monthly in most investment industry material, but some firms are quicker with this than others. Don't compare returns for periods ending May 31 to results to April 30 – even a month can have a significant impact on returns.
Rob Carrick