Financial Forum

This series, Financial Forum, is presented by Pro Advantage Services, Inc., a subsidiary of Pharmacists Mutual Insurance Company, and your State Pharmacy Association through Pharmacy Marketing Group, Inc., a company dedicated to providing quality products and services to the pharmacy community.

Total Return: The Big Picture of Investment Return

Sometimes the most obvious concepts are the ones we tend to forget. In the case of investment strategy, the concept of total return is such a simple one that many investors neglect to account for it when building their portfolios. But don't underestimate its significance.

Total return is the sum of two components -- investment income (dividends or interest payments) plus capital appreciation (the growth of the investment's market value). When combined, these elements give you the "big picture" of what your investment is doing for you.

The idea of total return applies to any investment that can fluctuate in market value. When you invest in growth mutual funds, stocks, or municipal bonds -- to name a few -- you need to consider total return, since these investments have a potential for gain and can appreciate over time. An investment such as an FDIC-insured CD, on the other hand, offers fixed income with no chance for capital appreciation.

Total return and stocks
The stock market is one area where total return can be a key indicator of your investment's success. And over the long term, total return on stocks has outpaced total return on other types of securities, although past performance does not guarantee future results.

Total return and municipal bonds
Total return can also be used to select bonds. Municipal bonds, for example, offer both fixed income in the form of federally tax-exempt interest payments, and the potential for capital appreciation -- since when interest rates drop, bond prices increase. However, while the interest is federally tax-exempt, appreciation in the bond's price, like any capital gain, is taxable, although they could be subject to state, local or Alternative Minimum Tax (AMT).

Many investors consider only the tax-exempt interest when they think of municipal bonds. Yet the price appreciation on a muni can add substantially to its total return if interest rates are falling while you hold the bond.

While it would seem that the idea of total return is all too obvious, it is often neglected as the best way to judge an investment. Often investors are bombarded with "compounded rates," "year-to-date rates," "effective yields," and so on. The prudent investor asks, "If I invest $1,000 in this today, sell it at $1,100 three years from now, and get 5.5 percent interest along the way, how much ends up in my pocket?"

Although other measures of return do have a bearing on one's judgment of an investment, for most of us total return is the most telling. And that's the big picture.

The Dow Jones Industrial Average is composed of 30 common stocks chosen by the editors of The Wall Street Journal as representative of the broad market and of American industry. Indexes are presented to provide you with an understanding of their historic long-term performance; they do not represent the performance of any security. Investors cannot directly purchase an index.

Provided by courtesy of Pat Reding, CFP? of Pro Advantage Services Inc., in Algona, Iowa. For more information, please call Pat Reding at 1-800-288-6669.