Corinna

Returns from investments explained

You invest to get a return on your money, but what does that exactly mean? We explain how investments earn returns and what kind of returns you could see from investing.

What are returns?

Returns are where the value of your investments increase in value (known in industry jargon as a ‘capital gain’), you get paid a dividend, or anything else where you end up with more money in return for investing. 

With investment funds you will see a return by the value of the units you have purchased increasing.

How do investment funds generate a return?

Investment fund managers invest in things that are expected to increase in value, or pay a dividend, or have a promised future payout (like a government bond). 

For example, the BlackRock Consensus Funds invest in a mixture of stocks and shares, as well as bonds. 

What kind of returns can I expect to see?

There is no guarantee of returns with investing, but it is likely that over the medium-long term you will see some return on a widely diversified investment fund. 

The returns from investing also compound, meaning you earn returns on the money you’ve earned as a return, so the growth can be exponential. 

Of course, as we’ve explained elsewhere, investing is a long term thing and you almost certainly see years where growth is low, stagnant, or even negative. Just make sure you’re keeping a 5+ year view on things and even consider spreading your money across multiple funds (for more on this see ‘can the value of my investment go down as well as up?’).

We list the average annual return for each of the BlackRock funds and you can find this alongside past performance information before you decide to invest in any funds. 

What are average annual returns?

The average annual return is a percentage that shows the average increase in value of a fund over the last five years.

How do we calculate this?

It is calculated using the annual return of the fund over the previous five years, or the lifetime of the fund (if trading for less than five years), and then averaging that number. 

We get this information directly from the fund manager at BlackRock and you can find full past performance details in the fund’s Key Investor Information Document (KIID).

For example, let’s say we have a fund valued at £1,000.

 
  • In year 1 this £1,000 grows by 4%, so is now worth £1,040.
  • In year 2 this £1,040 grows by 6%, so is now worth £1,102
  • In year 3 this £1,102 grows by 3%, so is now worth £1,135
  • In year 4 this £1,135, grows by 8%, so is now worth £1,226
  • In year 5 this £1,226 grows by 5%, so is now worth £1,287

The average annual return takes the percentage growth for each year and averages this.

So for this example the average annual return is: (4% + 6% + 3% + 8% + 5%) ÷ 5 years = 5.2% growth a year.

EXAMPLE ONLY. Your capital is at risk

 

Remember your Capital is at Risk and past performance is not a reliable guide to future returns. The value of your investment can go down as well as up and you might get back less than you originally invested.

 

Is the average annual return the return I will get?

The average annual return is a figure that shows the returns you may receive if the fund sees the same growth in the future as it has done in the past. 

But this is not the same as the actual return you will see. Your actual return may be higher or lower than the average annual return advertised. 

Remember, when investing your capital is at risk, and past performance does not indicate current or future performance, and should not be the only thing you consider when selecting a fund. 

You should carefully consider the risk profile before investing in a fund and understand that as a general rule, the higher the returns the greater the risk.

What is past performance? 

Past performance is simply how a measure of much a fund has grown in value since it was created.

You can usually see this expressed as a percentage figure looking at growth in value in the last year, over the last 3 years and the last 5 years, and also over the entire lifetime of the fund. 

Why doesn’t past performance equal future performance?

Whilst past performance can be illustrative of how an investment has performed and you can extrapolate that this pattern may continue, you cannot predict the future when it comes to investing. 

There are a number of reasons why the future performance of investments can’t be guaranteed, but mainly it’s to do with the volatile nature of stock markets, which have any number of political, social, economic and even environmental influences, that often cannot be anticipated. For example, the COVID-19 pandemic took the world by surprise and caused significant economic disruption in 2020.

However, investment funds try to mitigate the risk of unexpected shocks to growth by investing in a wide range of assets. 

A fund might invest in the 100 biggest companies in the UK (i.e. the ‘FTSE 100’) and mix in some UK government bonds.

 

It’s reasonable to expect that the 100 biggest companies in the UK will increase in value over the next 5-10 years. Given this has been the long term trend.

Granted one might fail, but for all of them to fail would be unlikely. And it’s also very likely the British Government will still be here to honour those bonds.

Of course, there could also be revolution in the next five years, causing the FTSE 100 to plummet and the British Government to be overthrown. Which would, needless to say, adversely affect the value of the fund.

This is obviously a much less likely outcome than the reasonable expectation of steady growth, but the important thing to take away is that unexpected events can, and do, occur, and no one can predict the future. So don’t invest any money you couldn’t handle losing.

 

Can the value of my investment go down as well as up?

Yes. All investing carries an element of risk, which means not only may the value of your investment go down, but you could lose all the money you invested.

Of course multi-asset investment funds do mitigate this risk by investing in a wide range of assets, and it is unlikely that you will lose everything.

However, it is likely that you will see bad years as well as good years, where the growth in value of the fund is lower, stagnant or even negative. 

The important thing to remember is that investment funds are a medium-long term investment, and it is quite likely over the long term (i.e. over 5+ years) that an investment fund spread in markets across the world will increase in value, but do bear in mind the ‘past performance does not equal future performance’ point above.

How do you work out the return on my investment? / What is the time-weighted rate of return?

We use an industry standard method to work out your personal rate of return. 

It is called in industry jargon the ‘Modified Dietz Method’. It takes into account; 

  • the value of your initial investment at the beginning of a period (i.e. start of the year); 
  • the value at the end of the period (i.e. end of the year); 
  • all the money you take in and out of the fund during that time;
  • and the length of time your money was in the fund.

It is widely considered one of the most accurate ways to reflect returns and is recommended by the Global Investment Performance Standards (GIPS), as a way to help investment returns be calculated consistently around the world.

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