Total Return, Net Yield.. What's the Difference?

A recent conversation on investment returns with friends prompted this post.

Say if one had invested $1,000 today and received $2,000 some time later. What is the return on investment? The typical answer is 100%. Most of us agree, isn’t it?

The total absolute return is 100% on the $1,000 investment (since net return of $1,000 divided by principal of $1,000). However, the time value of money is not taken into account.

Let me illustrate. Using the earlier example, we invest the same $1,000 today but with differing cashflows over 3 years. (negative sign denotes outgoing cashflow)

Year	Cashflow
2009	-1000	-1000	-1000
2010	0	1000	500
2011	2000	1000	1500
Net Yield (pa)	41%	62%	50%

All 3 investments have a total return of $2,000, but the net yield (or compounded return) varies according to the return of cash at different times.

As an extension of this example, the next time we look at an investment brochure or insurance benefit illustration, one would ask ‘what’s the compounded return per year?’ instead of focusing only on the nominal absolute return.

For your benefit, you may like to use this savings yield calculator to calculate the net yield the next time you are shown a savings plan for consideration.