Total Return Investing Defined
June 12, 2023 Author: Tess Downing, MBA, CFP®, Complete View Financial
Oftentimes when deciding what to invest in, consumers look to the expected returns area on each stock portfolio. While expected returns are important, there are other factors you should be looking at when deciding what assets to invest in. With factors in the stock market constantly changing, expected returns should not be used as the ultimate deciding factor.
While returns are universally known as a gain that comes from an investment, many people forget that returns can come in many different forms. Returns aren’t always in the form of cash. Different types of investments provide different options and methods to receive the returns. For example, if you purchase a stock for $20 and sell that stock ten years later for $100, this represents an $80 return. However, if that stock also yielded dividends, you could have greater returns than simply the $80.
With these different types of returns, it is important to look at the methods you want to use to invest. Do you want to focus on dividend returns (income streams) or hope that your stock will increase in value (asset appreciation)?
Total Return Investing
Both types of investments have strengths and weaknesses that they add to your portfolio. It is important to take a look at the investments you already have, and to decide which type of investment will best fit to cover any gaps that your portfolio is missing. A lot of times, people will utilize a “total return” mindset when making these decisions. This means that instead of looking at which investments are under each category, you simply choose the investment that is going to bring you the greatest returns.
Although this concept seems very simple to understand, it has also proven itself to be one of the most effective ways to make investment decisions. However, returns can not be used by themselves to make well informed decisions. You also need to look at risk levels, investment amount, and past performances to identify if this is the correct investment decision to add to your portfolio.
Through analyzing investments with these factors, you can create a well rounded portfolio consisting of many different types of assets. Diversifying your portfolio will help to decrease the overall risk your investments have as a unit. If you are able to take a step back and look at the big picture, you will be able to create a portfolio that produces the maximum return. Consulting a financial advisor is always recommended.