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Structure, income source, and key checkpoints for REITs.
This overview is for education only. It is not investment advice.
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Glossary
Glossary from article
Return is the gain or loss on an investment over a specified period, expressed as a percentage of the original investment. It measures how well an investment has performed and is the primary way investors evaluate the success of their investment decisions.
At its core, return answers a simple question: "How much money did I make (or lose) on this investment?" It is typically expressed as a percentage, making it easy to compare investments of different sizes.
Basic formula: Return = ((Ending Value - Beginning Value) / Beginning Value) × 100
Example: You buy a stock for $100, and it rises to $115
Simple analogy
Think of return like a report card for your investments. Just as grades tell you how well you performed in school, returns tell you how well your money performed while invested. An "A+" might be a 20% annual return, while an "F" might be losing 30% of your investment.
Example: If your investment returns 8% but inflation is 3%:
The real return is what actually matters for building wealth.
Example: A stock rises from $100 to $105 (5% price return) and pays a $3 dividend:
Always use total return
When comparing investments, always use total return. Dividends and distributions often account for 30-50% of long-term stock market returns. Ignoring them gives an incomplete and misleading picture of performance.
When comparing investments held for different periods, annualized return provides an apples-to-apples comparison by showing the equivalent yearly return rate.
Example: You earn 50% over 3 years
The annualized formula accounts for compounding and gives a more accurate picture.
Understanding historical returns helps set realistic expectations:
| Asset Class | Average Annual Return (1926-2023) | Volatility |
|---|---|---|
| US Large-cap Stocks | 10-11% | High |
| US Small-cap Stocks | 11-12% | Very High |
| International Stocks | 8-9% | High |
| US Government Bonds | 5-6% | Low |
| Corporate Bonds | 6-7% | Moderate |
| Gold | 5-7% | Moderate |
| Cash/T-Bills | 3-4% | Very Low |
| Real Estate (REITs) | 9-11% | Moderate-High |
Note: Past returns do not guarantee future performance.
A fundamental principle of investing is that higher potential returns come with higher risk. This is why:
Understanding this relationship helps you choose investments appropriate for your goals and risk tolerance.
You invest $10,000 and it grows to $14,000 over 4 years:
When you invest periodically, calculating returns is more complex. You need to use methods like:
Real-world returns must account for:
A fund that returns 8% but charges 1% in fees gives you only 7% net return.
Investors often compare their returns against standard benchmarks:
Beating your benchmark consistently over time is considered successful investing.
What to expect
For a diversified portfolio of stocks and bonds, expecting 6-8% annual real return (after inflation) over the long term is reasonable. Anyone promising consistent 20%+ returns with low risk is likely misleading you. If it sounds too good to be true, it usually is.