2 - 8.9 Types of Return Total Return: This is the annual return that includes gains, losses, dividends, and interest. Example: In one year, a price increases from $20.00 to $22.00. It also pays a 50¢ per share annual stock’s dividend. Total Return = ($2.00 + 50¢)/$20.00 = 12.50% Positive Net Return: This is a return that is positive - even when taxation and inflation are considered. Here is an example of positive net return. Table 2 7 Positive Net Return Example – – An investor holds 100 shares of a $20.00 stock that grows by 12.50%. Assume a tax rate of 50% and inflation rate of 2.5%. Annual Total Return Calculations 12.50% growth on 100 $20.00 shares $250.00 Taxes of 50% -$125.00 Net Return $125.00 Less 2.5% x 2,000 Inflation -$50.00 Positive Net Return $75.00 Negative Net Return: This is a return that is negative when both taxation and inflation are factored into the equation. 2 - 8.10 The Importance of Diversification and Asset Allocation The secret to successful investing is to start early, invest regularly, buy quality, maintain a modest lifestyle, have an emergency fund, have patience, and use common sense. Clients understand personal asset allocation. They use it in their everyday lives by disbursing assets in order of their priorities. Asset allocation, as it relates to securities and investments, is the disbursement of assets among three primary areas: stocks, bonds and cash. This assures that a portion of an investor's assets will be "in the right place at the right time." Diversification deals with the allocation of assets among various security classifications. The true test of asset allocation is meeting investor needs for returns that are more consistent and predictable. There is a relationship between risk and reward. For every unit of risk taken by an investor, a proportionate unit of reward should be received. Risk, the exposure to the chance of
2 - 8.9 Types of Return Total Return: This is the annual return that includes gains, losses, dividends, and interest. Example: In one year, a stock’s price increases from $20.00 to $22.00. It also pays a 50¢ per share annual dividend. Total Return = ($2.00 + 50¢)/$20.00 = 12.50% Positive Net Return: This is a return that is positive - even when taxation and inflation are considered. Here is an example of positive net return. Table 2 – 7 Positive Net Return – Example An investor holds 100 shares of a $20.00 stock that grows by 12.50%. Assume a tax rate of 50% and inflation rate of 2.5%. Annual Total Return Calculations 12.50% growth on 100 $20.00 shares $250.00 Taxes of 50% -$125.00 Net Return $125.00 Less 2.5% x 2,000 Inflation -$50.00 Positive Net Return $75.00 Negative Net Return: This is a return that is negative when both taxation and inflation are factored into the equation. 2 - 8.10 The Importance of Diversification and Asset Allocation The secret to successful investing is to start early, invest regularly, buy quality, maintain a modest lifestyle, have an emergency fund, have patience, and use common sense. Clients understand personal asset allocation. They use it in their everyday lives by disbursing assets in order of their priorities. Asset allocation, as it relates to securities and investments, is the disbursement of assets among three primary areas: stocks, bonds and cash. This assures that a portion of an investor's assets will be "in the right place at the right time." Diversification deals with the allocation of assets among various security classifications. The true test of asset allocation is meeting investor needs for returns that are more consistent and predictable. There is a relationship between risk and reward. For every unit of risk taken by an investor, a proportionate unit of reward should be received. Risk, the exposure to the chance of
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