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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.
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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.
Past returns do not guarantee future results, and investors should carefully consider fees, inflation, and the type of return reported.
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