It’s important to know what kind of return you can expect from your investments and how to determine the return that you are getting. Investment returns are calculated in a variety of ways, so understanding the methodology used is critical.

Probably the most commonly used method is total return. Total return on an investment includes income from dividends or interest in addition to price appreciation, or minus price depreciation. Price return just accounts for the change in the price of the underlying investment.

Over long periods dividends have accounted for roughly half of the total return on the S&P 500, so they have been a very important factor historically. For example, if XYZ stock was priced at $50 at the beginning of the year and was at $55 at the end of the year, the simple return without compounding would be 10%. If XYZ also paid a 5% dividend over that year, the total return would be 15%.

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According to data from Y-Charts, over the last year as of Monday, Sept. 16, the S&P 500 has had a price return of 3.55% and a total return of 5.69%, the difference being the dividends received.

Returns are also given over several different time frames. It’s common to see year-to-date, quarterly, monthly and one-year price returns quoted, as well as returns over longer time frames, sometimes they are averaged and annualized. The S&P 500 total return annualized using the same date as above has been; 10.92% over the last five years, 13.51% over the last 10 years and 9.01% for the last 15 years.

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Holding period return or HPR is defined as the total return on an investment over the period that it has been held. After-tax return is defined as the total return after the tax consequences of dividends and capital gains have been accounted for. If the investment is held in a qualified retirement account like an IRA or a 401K, taxes aren’t a factor.

Real return or inflation adjusted return is another commonly quoted type of return because inflation can eat into the purchasing power of the investment dollar. Real return is determined by subtracting the rate of inflation, by using an index like the CPI or Consumer Price Index from the total investment return over the same time frame, if the investment returned 10% over a year and inflation was 3%, the real return would be 7%.

Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information is at his blog at http://www.sellacalloption.com or 775-657-8065. The mention of securities should not be considered an offer to sell or solicitation to buy investments mentioned. Consult your investment professional to understand the risks and/or how the purchase or sale of these investments may be implemented to meet your investment goals. Past performance is no guarantee of future results.