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Understanding Investment Returns: How to Calculate and Interpret Them Correctly
Investment return is calculated by comparing the final value to the initial investment, expressed as a percentage. CAGR provides the average annual growth rate, accounting for compounding, unlike total return which is cumulative. Net returns, after fees and taxes, are usually lower than gross returns. Past returns do not guarantee future results, and investors should carefully consider fees, inflation, and the type of return reported.
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What happened
- 01Investment return is the percentage gain or loss relative to the initial investment amount.
- 02CAGR measures average annual growth considering compounding, unlike total return which is cumulative.
- 03Net returns account for fees, management costs, and taxes, unlike gross returns.
- 04Ignoring fees and comparing total to annual returns can mislead investment evaluations.
- 05Nominal returns exclude inflation effects; real returns show actual purchasing power changes.
- 06Past investment returns do not guarantee similar future performance.
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