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# What is a Cumulative Return?

A Cumulative Return is the total change in an investment's price over a set period, reflecting the compound effect of gains or losses. It's a comprehensive measure of performance, capturing the journey of your investment from start to finish. Wondering how this metric can guide your financial decisions? Let's explore its pivotal role in shaping investment strategies.
Malcolm Tatum
Malcolm Tatum

A cumulative return is the total amount of return generated by an investment within a specified time frame. This type of return allows for both gains and losses that are incurred during the period under consideration, and bases the final tally on difference in value from the beginning of that period to the last date of the same period. Typically, a cumulative return is presented as a percentage rather than a dollar amount.

There is some difference in exactly which factors are considered when determining the cumulative return on an investment. In some situations, any dividends earned are also included in the calculation. This is true even if the dividends are used for reinvestment in additional shares. At other times, the focus is on the actual increase or decrease in the price of each unit or share of the investment that is held for the entire time frame. Both methods are considered legitimate means of calculating this type of return. For this reason, it is important to identify which of the two formulas are employed in a given situation. Analysts sometimes preface the presentation of a cumulative return by defining the assumptions, or the specific process used to arrive at the figure.

Often, a cumulative return is annualized. That is, the period under consideration is normally either twelve consecutive months, or an actual calendar year. For example, the period may begin with 1 September of one year and conclude on 31 August of the following year. The time frame may also begin on 1 January and end on 31 December of the same year. When the cumulative return is annualized, it is sometimes referred to as a compound return, although there is some controversy over whether the two terms should be used interchangeably when referring to an annual period.

There are situations where investors will consider the cumulative return for a shorter period of time. It is not unusual for investors to look closely at the return generated during a given quarter, or for the first six months that an investment is held. This is helpful, in that the investor can get an idea of how well the investment is performing, and if that level of performance is within reasonable expectations. If so, then the investor will continue to hold on to the investment. Should the calculation of the cumulative return indicate the investment is not generating an equitable amount of return, it can be sold and the investor can seek out an opportunity that shows promise of earning a more attractive return.

Malcolm Tatum

After many years in the teleconferencing industry, Michael decided to embrace his passion for trivia, research, and writing by becoming a full-time freelance writer. Since then, he has contributed articles to a variety of print and online publications, including SmartCapitalMind, and his work has also appeared in poetry collections, devotional anthologies, and several newspapers. Malcolm’s other interests include collecting vinyl records, minor league baseball, and cycling.

Malcolm Tatum

After many years in the teleconferencing industry, Michael decided to embrace his passion for trivia, research, and writing by becoming a full-time freelance writer. Since then, he has contributed articles to a variety of print and online publications, including SmartCapitalMind, and his work has also appeared in poetry collections, devotional anthologies, and several newspapers. Malcolm’s other interests include collecting vinyl records, minor league baseball, and cycling.