What is annual total return?

The annual total return is a measure of the performance of an asset, usually a share or bond, over a period of time, usually several years. Expressed as an annual average, it allows the return to be measured against returns produced by other assets over the same time-scale.

Where have you heard about annual total return?

As an investor, you may well have come across references to total annual return in reports of asset and investment managers. This is because it is seen as a key measure of their performance in managing your money. The financial media also often discuss total annual return in looking at investments.

What you need to know about annual total return.

As the name suggests, it calculates the return on an investment using two principles.

One is that the measure should focus on the total return, including changes in the capital value of the asset, the payment of dividends, share buy-backs by the issuing company and any additional distribution to shareholders.

The other is that once the total return on the original investment has been calculated, it should be re-configured in such a way as to show the average return for every year of the investment’s life. It can be used for shares, bonds, commodities and investment funds.

The formula used to calculate annual total return is to add the sum of dividends or interest to the closing sale price and then divide this number by the initial investment price and subtract 1.