Cumulative investment return refers to the total return an investment generates over a multi-year holding period. Unlike periodic annual returns, cumulative returns capture the compounding effect of earnings to show overall profitability. For investors, evaluating cumulative returns is crucial to assess long-term growth of assets. This article will explain the concept of cumulative investment returns and provide examples to demonstrate calculation and interpretation. Proper comprehension of cumulative returns empowers smart decision making over extended timeframes spanning bull and bear markets.
Cumulative return illustrates compound growth over investment horizon
An investor who purchased a stock at $10 per share that paid no dividends but appreciated to $20 over 5 years would have a 100% total return. However, this fails to account for annual compounding. If the stock rose 20% each year, the cumulative 5-year return is $10 growing at 20% annually to end at $26. So while the total gain was 100%, the cumulative compound return is 160%. This demonstrates why cumulative returns better reflect long-term growth potential.
Cumulative returns help assess fund manager skill over full cycles
Mutual fund cumulative returns over 5- or 10-years smooth shorter-term volatility to evaluate the manager’s ability to compound wealth over full market cycles. Comparing a fund’s cumulative return to its benchmark determines if active management added value over passive investing through skill, not just luck.
Personal investment benchmarks rely on cumulative returns
Individuals saving for retirement depend on portfolio cumulative returns hitting targets to sufficiently fund future lifestyle needs. Failure to achieve required returns over working career spans may result in funding shortfalls. Investors must also consider cumulative returns on cash savings to determine total purchasing power erosion from inflation over time.
In summary, cumulative investment returns render a complete picture of compound growth essential for investors with long-term objectives. Assessing cumulative performance facilitates appropriate decision making to working towards financial goals over full bull bear cycles.