Total return is a measure that captures the overall performance of an investment. It includes all forms of returns – capital gains, dividends, interest income and distributions. This measure is expressed as a percentage of the initial investment amount.
Total return is crucial for understanding the complete picture of an investment's performance. For stocks, it includes not just the price appreciation but also dividends. In the case of bonds, it includes interest payments along with any changes in the bond's price. This comprehensive approach provides a more accurate reflection of an investment’s profitability.
Investors use total return to compare the performance of different investments or to assess the performance of a single investment over time. It's particularly important for comparing investments with different types of returns, such as stocks (which may pay dividends) and bonds (which pay interest). However, investors should also consider factors like risk, investment horizon and tax implications when relying on total return for investment decisions.
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