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Cumulative investment return, explained

Chartered Investment Manager

Cumulative investment return represents the total percentage return on an investment over a specified period, accounting for both capital appreciation and other returns such as dividends or interest. It provides a comprehensive view of how an investment has performed over time, without considering the effects of inflation or taxes.

To understand cumulative return better, let’s use a simple example:

Suppose you invest $100 in a stock.

  1. At the end of the first year, the stock has risen in value to $110, giving you a return of 10% for that year.
  2. During the second year, the stock rises to $121, which is a 10% return for the second year.

The cumulative investment return isn’t just 20% (10% + 10%). To calculate the cumulative return, you’ll consider the compound effect:

Initial investment: $100

End of Year 1: $100 + ($100 x 0.10) = $110

End of Year 2: $110 + ($110 x 0.10) = $121

Cumulative monetary gain = $121 – $100 = $21

Cumulative investment return as a percentage = ($21/$100) x 100 = 21%

So, over the two years, the cumulative investment return is 21%, not just the simple addition of the two yearly returns.

In practice, the calculation can get more complex with multiple investments over time, dividends, interest, and other factors. For investments like stocks that pay dividends, if the dividends are reinvested, they contribute to the investment’s total value and are factored into the cumulative return.

When evaluating investments, it’s essential to look at both annualized returns (which break down returns on a per-year basis) and cumulative returns to get a comprehensive view of performance over time.

What is a good cumulative investment return?

A “good” cumulative investment return is subjective and depends on several factors, including the investment’s time horizon, the asset class in question, the overall market and economic conditions, and the investor’s goals and risk tolerance. However, there are some general benchmarks and considerations:

  1. Historical Market Averages: Over the long term, the U.S. stock market, as measured by the S&P 500 index, has had an annualized return of roughly 7-10% after adjusting for inflation. If you’re evaluating a stock-heavy portfolio over several decades, this might serve as a benchmark.
  2. Asset Class: Different asset classes have different expected returns. For example:
    • Stocks generally have higher expected returns than bonds but come with higher volatility.
    • Government bonds are typically safer and have lower returns than corporate bonds or high-yield (junk) bonds.
    • Real estate, commodities, and alternative investments have their own return profiles.
  3. Time Horizon: Longer investment periods generally allow for higher risk tolerance and potentially higher returns due to the effects of compounding and the ability to wait out market downturns.
  4. Risk Tolerance: Higher potential returns usually come with higher risk. If an investment promises significantly high returns, it’s essential to evaluate the associated risks.
  5. Investment Fees: A good gross return might be significantly diminished by high fees. It’s vital to consider the net return after all costs.
  6. Economic and Market Conditions: During booming markets, a “good” return might be quite high, whereas during downturns or recessions, simply preserving capital might be seen as a good outcome.
  7. Individual Goals: A good return for one person might not be the same for another. It all depends on individual financial goals, whether it’s capital preservation, generating income, growing assets, or beating a specific benchmark.
  8. Benchmarks: Comparing the cumulative return of an investment or portfolio to a relevant benchmark index can give context. For example, compare a portfolio of large-cap U.S. stocks to the S&P 500 index.
  9. Inflation: A good nominal return might not be as impressive in real terms if inflation is high. Always consider the real return, which is the return after adjusting for inflation.
  10. Global Comparison: In periods where U.S. markets might be underperforming, international or emerging markets might be outperforming, and vice versa. Diversification across geographies can influence cumulative returns.

In summary, while there’s no fixed number that defines a “good” cumulative investment return universally, assessing the factors mentioned above and considering personal goals and circumstances can provide clarity. It’s often helpful to consult with a financial advisor or investment professional when evaluating investment performance.


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