Focus on Total Return

February 01, 2018
By Patrick V. Masso, CFA

Close your eyes and imagine Tampa Bay beach. Many elements probably come to mind – white sand, clear blue water, sun, perhaps a gentle salty breeze.

If just one of those elements changes – such as the gentle breeze becoming a hurricane-force gale – the scene changes significantly.

Portfolio returns are also composed of many factors, which, when combined, paint a complete picture. Let me explain…

Many investors focus solely on the current income – interest and dividends – produced by their portfolio. While undoubtedly important, current income is but one aspect of a portfolio’s total return. Liken it to Tampa Bay during Hurricane Irma. The sand was still there, but where was the water? Not your typical beach experience…

Total return incorporates not only the interest income generated from bonds held in the portfolio and dividend income generated from stocks, but also the upward or downward price movements in both asset types.

Like our beach scene, portfolio returns also have wind. Portfolio “wind” comes in the form of fees, taxes, and inflation. Each of these acts as a drag on total return and should be taken into account when establishing expectations.

Some investors are naturally inclined to fill portfolios with “income-producing” assets like bonds and “high-dividend” value stocks. This line of thinking can have a major impact on a portfolio – 2017 provides an excellent case study.

In 2017, the Russell 1000 Value Index generated a total return of 13.66%, while the Russell 1000 Growth Index posted a total return of 30.21%. High dividend, value-oriented investors missed out on substantial gains (an additional 16.55%!) if they favored the higher dividend-generating Russell 1000 Value Index.

The most effective investment approaches have built-in flexibility to avoid the pitfalls of rigid investment predispositions. Global economies and markets are constantly changing. Focusing on which types of investments will likely generate the greatest total return given the current (and probable future) investment landscape should produce better results in the long run.

Securities and insurance products are NOT deposits of Heartland Bank, are NOT FDIC insured, are NOT guaranteed by or obligations of the bank, and are subject to potential fluctuation in return and possible loss of principal.

Legal, Investment and Tax Notice: This information is not intended to be and should not be treated as legal advice or tax advice. Readers should under no circumstances rely upon this information as a substitute for their own research or for obtaining specific legal or tax advice from their own counsel.

This content is for informational purposes only. Readers should under no circumstances rely upon this information as a substitute for their own research or for obtaining specific advice from their own counsel.