Return

The return is what your investment has earned you. It sounds simple, but the same gain can be stated in four different ways, and each of them answers a different question.

So it is worth knowing which one you are hearing.

Four views of the same thing

The absolute return is the amount in euro. In your case €100. It says how much money was added but on its own it says nothing about whether that was a lot. A hundred euro on a hundred thousand is something else entirely from a hundred euro on a thousand.

The percentage return puts that in proportion to the amount invested. Those €100 on €1,000 are 10%. That is exactly why investments are compared in percent: it is the only way to put a small and a large investment side by side.

$$\text{return in \%} = \frac{\text{final value} - \text{amount invested}}{\text{amount invested}}$$

The nominal return is the figure you see on the statement. Those 10%.

The real return is what is left of it after deducting inflation. If prices rose by 3% in the meantime, your actual gain is roughly 6.8%. You have 10% more money, but it buys only about 7% more things. The entry on real vs. nominal return goes into this in detail.

Why it matters

Without percentages you cannot compare. Without the real return you do not know whether you have got richer at all. And without knowing over what period the return arose you know almost nothing: ten percent in a year is an excellent result, ten percent over ten years is a poor one.

Over longer horizons, moreover, the return does not grow in a straight line but builds on itself. Exactly how is explained by compound interest.

What to watch out for

A return without a period means nothing. Always ask "over what period". Serious comparisons quote the return p.a., that is annually.

A past return is not a promise. That a fund made 15% last year says nothing about what it will do this year. A high past return also tends to come with higher risk.

Try it yourself

In the compound interest calculator you can see how a percentage return turns into a concrete sum over the years and how much inflation affects it.