What IS a 'market return'?

Jon_W

Hello everyone. This is not a joke question. I have a few quid to invest and have bought a book extolling the virtues of passive funds. But this term is used without elaboration and Google searching tells me it's dividends. My Q s are these:

1. The figure is expressed as a percentage. A percentage of the total value of money invested in a market in a given year, or the total value of all investments in the market at that point in time?

2. Does it include capital gains?

3. So if I own £100 of shares in Company A or Fund x, a yield of (say) 7% for 2018, the % is worked out in the same way as the answers to 1 & 2, above?

I am so sorry to ask dim Qs. Yes I will take advice before doing anything, and widely, but I really don't want to go into a situation where I have no knowledge whatsoever so could be at their whim.

AlanP_2

Market Return = the percentage increase on what is invested across the whole market.

So if you owned every single share in every single FTSE 100 company the market return on the FTSE 100 would equal your personal return.

It includes capital growth and dividends.

Same for other markets.

In reality you can't own all of everything but it does provide a benchmark against which you can compare individual investment choices you are considering.

When comparing make sure you are looking at the same timeframe in each and look at comparative performance across a range of timeframes not just the "last 12 months".

A Tracker fund would typically "match" the market return for the market it is invested in - less a very small amount of Tracking Error, typically caused by the %'age fee the provider charges on the fund.

Yield is normally used in the context of shares or bonds and is the value of the dividend or interest paid relative to the price at the time.

For example if a company is paying £1 in dividends per share and the share price is £20 it would be a 5% Yield.

If the price dropped to £10 then the Yield would be 10% and if it increased to £25 then the Yield would drop to 4%.

No Dim Questions, the best way to increase what you know is to look into it and ask for an explanation if things aren't clear.

jdw2000

Market return is the amount the whole market place goes up or down.

If generally speaking the market place went up by 2%, and your own stocks and shares went up by 3%, then your return is above the market return.


If my house sells for more than other similar houses in my area then I have achieved above the market price.

Jon_W

Thanks AlanP and jdw2000. There is a bit of a divergence in your views: one considers dividends as part of market return and one of you doesn't.

SO: if a return (or the market return) is a % and includes dividends as well as growth (or decrease in value) how is THAT calculated?

To keep it simple, say fund A (or the entire market!) as a value of £1000 at 1 Jan 2018. By 1 Jan 2019 it is worth £2000 and paid dividends of £100.

What is the market return as a %? Obviously if market return is capital gains it's 100% (if only!). But how is the dividend factored in and expressed as a percentage here?

AlanP - are you SURE there are no dim questions...?

BLB53

If it is total return, this includes capital appreciation AND dividends combined.

In your example, the total return is 110%.

jimjames

Jon_W wrote: »

Thanks AlanP and jdw2000. There is a bit of a divergence in your views: one considers dividends as part of market return and one of you doesn't.

I don't see it as a divergence. There are 2 types of market return, capital and total. One includes dividends the other doesn't.

So the FTSE100 capital return is the number you see every day and often quoted as showing it's not risen in 18 years, there is also a total return including dividends which shows a very different picture.

Jon_W

Thanks, Jim James and BLB.

SO: capital value % increase + % yield = total market return, correct?

So, say the value of this fund on 1 January 2020 has increased from £2000 to £3000. That's a market return of 50%

Again, a dividend of £100 is paid. This is a 5% yield.

So total market return over the year 2019 = 55%?

BLB53

So, say the value of this fund on 1 January 2020 has increased from £2000 to £3000. That's a market return of 50%

Correct...and the total return on your original investment is £2,000 capital appreciation and £200 dividend income - so 220%.

Jon_W

Gotcha! Thanks, BLB.

Jon_W

Thanks again, BLB. That makes sense.

Joe_Bloggs

I think I should point out that it costs to:-
Get in, to trade, re-invest, get out of a market. These costs must be factored in to a market return figure. To ignore such costs would be an error of judgement.
J_B.