AboutJohn D Smith, CFP Expertise I can answer detailed questions regarding mutual fund investing, retirement planning, education planning and related financial planning/investment issues. I have a B.S. degree in Financial Planning & Counseling. I am also a Certified Financial Planner practitioner and have performed fee only investment management and financial planning services for the past 11 years.
Expert: John D Smith, CFP Date: 9/1/2005 Subject: Rate Of Return & Total Return
Question Hello:
I want to thank you for the reply. I am somewhat confused. You indicated in your reply "rate of return is often used to describe an annual return over more than one time period (ex. 6% rate of return per year)..." but isn't one year one time period?
And you also indicated that "total return on investment is used to describe a rate of return over one time period (ex. your total return from 2000 - 2004 was 6%)." but isn't 2000-2004 is more than one time period.
I thank you for your clarification reply.
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Followup To
Question -
Hello:
Is there a difference between rate of return and total return on an investment?
Perhaps you can provide some helpful examples.
I thank you for your reply.
Answer -
Both terms are used to provide and investor with a benchmark of performance. Depending on the context of how each term is used, rate of return is often used to describe an annual return over more than one time period (ex. 6% rate of return per year) whereas total return on investment is used to describe a rate of return over one time period (ex. your total return from 2000 - 2004 was 6%). Again, both terms describe return on investment; it's the context of the verbiage that may be different. I hope this helps.
Answer Hi again, and sorry for the confusion. As I mentioned the phrase rate of return and total return on investment essentially mean the same thing in that they both try to capture the performance of your investments. However, the term "rate of return" is often used in a phrase such as "my portfolio has averaged a 7% annual rate of return from 2000 - 2005", whereas the term "total return" is oftened used in a phrase such as "my portfolio has achieved a total return of 35% from 2000 - 2005". In this example, the first phrase is geared towards rate of return each year and the second phrase is geared towards total return over the time period (7% x 5 years = 35%). I hope this helps clarify.
