What is a Realized Return?
A realized return is the amount of actual gains that is made on the value of a portfolio over a specific evaluation period. This figure takes into consideration any earnings generated by each of the assets contained in the portfolio, as well as any losses that were incurred as a result of a shift in the value of the individual assets. It is also possible to identify the realized return associated with each asset that is held in the portfolio.
There are several reasons why an investor would want to periodically confirm the actual return generated on his or her investments. The first has to do with the stability of the portfolio itself. If the rate of return for the portfolio overall is low or should decrease, this is a sign that some diversification in the types of investments would be a good idea. In the event that the portfolio is already diverse, a loss in return could indicate that one or more of the investment types compose a higher percentage of the overall worth of the collected assets than they should. With both scenarios, noting that the realized return is not what it should be can prompt the investor to make changes before further losses are incurred.
When calculating the realized return on a portfolio that includes bond issues, it is important to focus on the actual interest payments that are received on bond coupon for the period cited. For example, if a bond issue with a ten-year duration offers a 5% annual interest payment, the investor will only include that amount in the return if the payment has already been received. By contrast, the investor will note any increases in the unit price of each share of stock in the portfolio, since that figure reflects the change in the market value of those shares as of the end of the period under consideration.
Employing the calculation of a realized return can go a long way toward helping an investor make decisions about what assets to hold for a little longer, which ones to sell immediately, and when acquiring additional shares or units of a given investment would be a wise choice. By measuring the rate of return over time, it is possible to determine if the goals set for the investment effort are being met, and the potential impact of buying and selling assets on reaching those goals. As a management tool, knowing the realized return for successive periods can help an investor arrange his or her assets to best effect, and position the portfolio to move onward to the next level of profitability.
I am not a very experienced investor, but do have a few stocks in a mutual fund. I can see how people are intimidated at trying to make sense of the financial reports they send out.
From what I can see, it looks like the realized return of my investment has gone down for a few years in a row.
I thought that by investing in a mutual fund I was spreading my money out over more than one stock. How do you know when your realized return is too low, and you should look to invest in something else?
Being diversified in your investments is one thing that is important, and should help balance your realized returns. If one investment is doing poorly, hopefully you will have others that are doing well and give you balance.
One thing I always think about before selling something that has a poor rate of return are the tax consequences. When you sell something like a stock or mutual fund, there are always tax consequences you need to deal with and report.
At that point I have to determine if it is better to deal with the tax consequences, or hold on to it a little longer to see if it will improve.
@julies - At least you are looking over your annual statements and keeping track of what your portfolio is doing. I worked in investments for several years, and was always surprised at the number of people who didn't read their annual reports because they didn't understand them.
They relied on someone else to tell them what was happening with their money. Many people will look at their realized returns when it comes time to do their taxes. This is a good time to really take inventory of what you have and see if an investment is growing or not.
Sometimes it is worth holding on to it if you expect the realized return to improve, or you may need to think about selling and buying something else that will bring a better rate of return.
I used to receive quarterly reports in the mail from some of my investment companies. This was always a good time to look over my portfolio and look at the realized return on my investment.
Now I look at the quarterly reports online and only receive an annual report in the mail once a year. While it is easy to go online and check my investments, I find that I don't do it as often as I should.
When I get my annual report in mail every year, I make sure to see how each investment is doing, and see if the realized rate of return is performing as I hoped it would.
It is always nice to see growth in my portfolio, but when the rate of return is lower than expected, it is a good time to decide if I need to move some things around.
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