Know Your Investment Returns

The Dow is down around 34% since mid-May. Or is it? Sometimes, performance is largely in the eye of the beholder.

With all of the different ways to measure rates of return, the numbers you read in investment prospectuses and papers might not mean as much as you would think. So, want to know how to measure your investment performance objectively? Read on.

The Problem With Measuring Returns

It's hard not to take note of all the news articles that have broken down the trillions of dollars that the country has lost that was right there, on our collective investment account statement, just a few months ago.

In 2008 alone (so far), the S&P 500 has taken a 40% dive, and investors throughout the country have seen their investment accounts and 401(k)s deplete at an alarming clip.

What kind of returns have you seen this year?

According to Morningstar, the average large cap mutual fund had a total return of almost negative 41% this year (not a far cry from the S&P). That means that the price of any given large-cap mutual fund dropped 40% after interest, capital gains, and dividends. Not a pretty picture.

Returns are not always as objective as they may seem. The main reason for this is because it's not always clear what a "return" is. Is a return the price appreciation of a stock you own? Is it the value appreciation? Does it take periodic losses into account?

With that added attention, you may have noticed that big indices like the S&P 500 and Dow Jones Industrial Average don't always move equally -- at any given moment in the trading day, the Dow could be up, while the S&P could be in the red. But why is that? Aren't the S&P and the Dow supposed to give us an accurate view of what happened overall in the market?

Well, one reason is that they don't look at all the same stocks -- the S&P follows an extra 470 of the country's biggest companies. But even if the two followed the same exact companies every day, they wouldn't show the same returns at the close of the trading day.