What is Foolsaurus?

It's a glossary of investing terms edited and maintained by our analysts, writers and YOU, our Foolish community.

Total average return

Total average return, expressed as a percentage with time period not explicit, is the average of all the returns of group of investments over a period of time.

This is not annualized. Divide by the number of years held to produce an annual average return.

This is simple enough if all the investments are owned over the exact period of analysis. If some are sold before the end of the time period, or are purchased later in the time period then there are different ways to handle this.

The Stock Advisor takes the total percentage return of each stock during the period and averages them all together. The resulting total average is expressed over the total time of investment, not as an annual average return. One can divide by the total years of Stock Advisor existence, but this could be misleading as some are held for along time and other not so long.

Also one's own investments will involve different amounts invested, and the total monetary return could be very different. If two people take the same portfolio and one invests 50% in the best preforming stock, and the other 50% in the least performing stock, the total monetary returns could be very different.

Similar calculations can be envisioned. For example, the compound interest formula can be used to arrive at the average rate of return compounded per year. It is also possible to plot out the value of the portfolio at the end of each year and use curve fitting (usually least squares) to draw the best line through the data. One then uses the slope of the line as the average rate of return.

All of these methods are used to compare the performance of one portfolio or one investment manager with another. But none of these predicts future performance. Hence, they are guide lines that are best used to group similar performers together. Small differences are often meaningless. Over reliance on these methods can result in faulty decisions.

Related Fool Articles


Related Terms

Related Fool Discussion Boards

Post your questions on Motley Fool's "board name" board.

[to board]

Recent Mentions on Fool.com