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Break Down Total Returns Into Capital Appreciation and Income
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Excerpted from Bogle on Mutual Funds by John C. Bogle, page 63
What is too often ignored in fund performance comparisons is how much total return is derived from capital appreciation and how much is derived from dividend income. In general terms, capital returns of stock funds (including the change in a fund's share value adjusted to take into account the reinvestment of any capital gains distributions) have been volatile, sometimes positive and sometimes negative. This volatility is muted in balanced funds, even more so in bond funds, and nonexistent in money market funds. That said, the dividend streams of stock funds and balanced funds have generally been stable, with an upward bias, while the dividends on money market funds - comprising 100% of their total returns - are notoriously volatile. Table 3-2 gives some idea of the difference between these two components of return for the major types of funds, using the 15 years ended December 31, 1992.
This table shows that considering total return in terms of its capital and income components makes it even more useful for measuring past performance. Such information is critical if you are in the distribution (income-producing) phase of your investment life cycle. But it also helps to compare major investment styles if you are in the accumulation (investment and reinvestment) phase. For example, there is a substantial difference in the contribution of income to the total returns of various types of equity funds that has important implications for investors with long-term growth objectives.
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