What is total return?

Total return is the complete gain or loss on an investment over a period: the change in its price plus everything it paid out along the way — dividends, interest, fund distributions — minus the costs of buying, holding and selling it. It answers the most basic question about an investment: how much wealth did it add?

Price change on its own leaves out income. For a stock paying a 3% dividend, that is a large part of the result; for a bond or a savings account it is nearly all of it. That is why fund factsheets, index providers and performance statistics quote total return.

The formula

For a single holding over one period:

\text{Total return} = \frac{(P_{\text{end}} - P_{\text{start}}) + D - C}{P_{\text{start}}}

where

$P_{\text{start}}$ and $P_{\text{end}}$ are the value of the holding at the start and at the end of the period,
$D$ is the income received in between: dividends, interest and distributions,
$C$ is the costs paid: order fees, taxes withheld at source, custody fees.

The result is usually shown as a percentage. The numerator on its own is the total return in euros.

A simple illustration

Shares are bought for €10,000. A year later they are worth €10,600, they have paid €300 in dividends, and buying them cost €10 in fees.

\text{Total return} = \frac{(10{,}600 - 10{,}000) + 300 - 10}{10{,}000} = \frac{890}{10{,}000} = 8.9\%

The price return alone would have been 6%. The dividends add three percentage points; the fee takes away a tenth of one.

Total return of a whole portfolio

In a portfolio, money comes and goes: deposits, withdrawals, purchases paid for with new savings. Dividing the gain by the starting value no longer works, because part of the final value is simply money that was added. The gain in euros is measured against the capital actually put in:

\text{Gain} = V_{\text{end}} - V_{\text{start}} - \text{Deposits} + \text{Withdrawals}

Turning that gain into a percentage means deciding how to treat the timing of the cash flows. The time-weighted return removes it, to judge the investments; the money-weighted return includes it, to judge what the money actually earned.

Common pitfalls

Leaving out dividends. Comparing a stock's price chart with an index quoted as total return makes the stock look worse than it did.
Leaving out costs and taxes. Fees and withholding tax on foreign dividends are small in any one year, but they compound over decades.
Comparing periods of different length. 20% over five years and 20% over one year are very different results. Convert both to an annualized return before comparing them.
Counting savings as gains. A portfolio that grew from €50,000 to €60,000 has not earned €10,000 if €8,000 of it was new money.

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