The word "return" hides several different numbers. If you don't know which one someone is quoting, you can be quietly misled. This guide untangles the most common ones.
Total Return vs Price Return
Price return is just the change in price. Total return includes dividends and distributions reinvested. For dividend-paying stocks the gap is enormous — a chunk of the S&P 500's long-term return comes from reinvested dividends.
Annualized Return (a.k.a. CAGR)
A 50% gain in 2 years isn't the same as a 50% gain in 10 years. Annualizing puts every return on a level playing field. The formula is CAGR = (End / Begin)^(1/years) − 1. Plug your numbers into the CAGR Calculator.
Real vs Nominal Return
A 7% nominal return when inflation is 3% is really 4% in purchasing power. Long-term planning should be done in real dollars, not nominal.
After-Tax Return
For a taxable account, every dollar of dividends and short-term gain is taxed at your ordinary rate. Long-term capital gains get a discount. A "10% return" can be 7% after taxes — or higher if it's inside a Roth IRA.
Risk-Adjusted Return
Two investments returning 10% are not equivalent if one swings 5% a year and the other swings 30%. The Sharpe ratio expresses return per unit of volatility. A higher Sharpe ratio means a smoother ride for the same return.
Putting It Together
When comparing investments, ask: total or price? Annualized or cumulative? Real or nominal? Before or after taxes? The honest answer is almost always lower than the headline.
Use our ROI Calculator to compute both total and annualized return on any holding, and the Compound Interest Calculator to project realistic long-term outcomes.
Frequently Asked Questions
What is the difference between total return and price return?
Price return only measures the change in a security's share price, while total return also includes reinvested dividends and other distributions. For dividend-paying stocks, this gap can be substantial over long periods, since a meaningful portion of long-term stock market gains has historically come from reinvested dividends rather than price appreciation alone. When comparing investments, it's important to confirm which measure is actually being quoted.
What does "real return" mean and why does it matter?
Real return is your investment return after subtracting the effect of inflation, showing the actual growth in purchasing power rather than just the nominal dollar figure. For example, a 7% nominal return during a period of 3% inflation represents roughly a 4% real return. Long-term financial planning is generally more accurate when done using real, rather than nominal, figures.
How do taxes affect the return an investor actually keeps?
In a taxable account, dividends and short-term gains are typically taxed at your regular income rate, while long-term capital gains usually receive a lower preferential rate, so the after-tax return investors keep is often noticeably below the headline pre-tax return. A return earned inside a Roth IRA, by contrast, can be tax-free upon qualified withdrawal. Because tax treatment varies by account type and individual bracket, investors with significant gains may want to consult a tax professional.
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