What is a return, and how does it benefit you as an investor?

As a novice investor, you often hear that the return is the ultimate measure of success. Yet is that always the case? History and experience tell us that returns come in many different forms. After reading this blog, you'll be all set to start working out which is the best option for you.

Three types of return on investment

Let's start with a definition. The return is the actual return on your investment, and is usually expressed as a percentage in addition to your initial investment. If you invest €1,000, for example, and that amount is worth €1,070 after one year, your return over the year would be 7%.

What is mentioned less often, if at all, is that returns can also be negative. If this does happen, your investment will fall in value compared to the amount you originally invested.

How your return is worked out largely depends on the type of investment you choose. Broadly speaking, there are three main types of returns:

• Return on shares: The return on your investment in shares following a price rise.
• Dividend yield: Annual profit distribution paid out by the company in which you own shares.
• Bond yield: When you buy bonds, you lend money to a company or government and receive interest in return.

How is the return calculated?

The basic formula used in the above example is simple:

(end value - start value)/start value x 100 = % return

Bear in mind that this refers to the return you build up over a certain period. If you're interested in your return on a monthly or annual basis, you should divide it by the number of months or years for which the investment is held.

You may also hear investors talking about the YTD (year-to-date) return from time to time. This represents the return accrued since the start of the current calendar year to date.

What has the biggest impact on your return?

The actual return that will appear in your account in the future also depends on a large number of other factors.

1. Your risk appetite

Investing means investing money in the stock market. And prices on the stock market can fluctuate, going both up and down. As an investor, you can target a high return by adding more risk to your investment strategy. One way of doing that is to try to find the ideal moment – in other words, time the market – and invest heavily straight away.

Read more about the risks involved in investing here.

On the other hand, you may opt for a more defensive approach and spread your shares over time and/or across a wider range of shares. Alternatively, you could also adopt a neutral approach and switch between the two as you see fit.

Your investor profile will also play a role in determining how stable and consistent your returns will be. Have you already established your investor profile?

2. Your investment horizon

Investments aren't made just for a few months; they are measured in years. By broadening your investment horizon – in other words, increasing the term of your investment – you are opting for a more stable return in principle. The longer you hold your investment, the more any price rises and falls will even out over time.

3. The investment type

Different investment products can also generate different returns. The rule of thumb here is that the higher the risk, the higher the potential return. However, there's also a greater chance of significant losses.

• Traditional individual shares: Historically, this type of investment yields the highest potential average return, at around 6% to 8%. The other side of the coin is that there's a greater chance of seeing your returns fluctuate.
• ETFs or trackers: You invest in a package of several investments – shares, bonds, commodities and more – that seek to track the average return of a specific index. In principle, this means that your potential return is more stable, but is usually lower than that generated by individual shares.
• Bonds: Bonds may well be one of the safest investments, with a very stable, but rather limited potential return of around 2% to 4% per year.
• Investment funds and savingscertificates: Investing in a savings certificate means you lend money to your bank for a certain period of time. You can also invest in investment funds through your bank, as an alternative form of savings. Here, too, the estimated return is more stable, but relatively low compared to most other types of investments.

4. Investment costs

A return of around 6% doesn't mean that you'll be able to add the full 6% to your portfolio any time soon. After all, you will incur a number of fees along the way that will be deducted from your gross return.

Examples include one-off entry fees to your broker, transaction fees when buying or selling shares, management fees for ETFs and more, or stock market taxes such as withholding tax on dividends.

"The stock market should be in the news on New Year's Eve every year"

"In my opinion, the return is the only objective measure for assessing an investment approach correctly. I'm talking about long-term returns, of course, and three-, five- or ten-year terms. Studies are unanimous: the longer you leave your investment to work for you – especially in the case of shares – the less likely you are to make a loss and can therefore build up a positive return."

"The stock market usually only hits the headlines when prices nosedive. Actually, it should be the other way around. If news broadcasters were to focus on the stock market numbers every New Year's Eve, most of the share prices would be in the green."

"All too often I still see many novice investors influenced by short-term results, vague stock market reports on "experts'" websites, or well-known names in the media. The chances of making the wrong decisions then go up very quickly."

"The markets are moving faster than investors realise. The stock market's best and worst days are often close together, and sometimes even in the same week. Trying to time the market as a beginner can therefore be a risky move, as you risk missing out on the days that actually make a long-term return."

Geert Van Herck, Chief Strategist at Keytrade Bank

What does such a return look like in practice?

In summary, a return is not a guarantee. But those who are patient with their investments and can put their trust in a long-term approach increase their chances of success. Below is a practical example. Imagine:

• At the end of December 2000, you invested in shares of the MSCI World Index, a collection of 1,500 medium-sized and large companies from twenty-three developed countries around the world.
• Over twenty-five years, this investment yielded an average net return of 6.95% per year.

More specifically, what if today, you invested $100 a month in the S&P 500 Index, the 500 largest US companies on Wall Street?

• With an annual return of 8%, your investment could give you a return of $150,030 after thirty years.
• A peak return of 13% over the same period could yield as much as $230,918.

In short, staying patient – when combined with smart decisions – can be the key to building up significant assets.

Are you ready to jump in?

Even if investing remains somewhat unpredictable in nature and therefore represents a risk, your return remains inextricably linked to your investment objectives, strategy and the risks you are prepared to take. Taking the right approach can therefore pay off. If you are ready to refine it, dive into the potential returns offered by our investment products at Keytrade Bank now!

Find out all about investing with Keytrade Bank