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Total Return vs other performance measures?

A helpful place to also put any annual reports etc, of your own portfolios
Newroad
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Total Return vs other performance measures?

#433391

Postby Newroad » August 9th, 2021, 9:04 am

Morning, All.

I get the sense there have been many debates on this over time, some perhaps heated. I wasn't around for these, so please accept my apology in advance for any ignorance on these matters.

With the above said as a starting point, by default, nothing other than considering Total Return makes sense to me. However, there are some very obviously intelligent people on the forum who appear to think otherwise. Though I can think of some reasons why this might be the case (which I will get to below) it is also possible I'm overlooking something.

In context, here are the possible reasons I can think of why Total Return might not be the be all and end all of measurement*

    1. Taxation - it may for some people in some jurisdictions better to get (say) dividend income rather than capital appreciation
    2. Excess Administration - it may for some people be preferable to simply sweep up dividend/distribution income rather than have the hassle of regularly selling shares/units
    3. Excess Costs - dealing spreads, or for some sufficiently small pots, transaction costs in general, may make relying on dividends/distributions relatively more attractive
    4. Definition - maybe "Total Return" doesn't mean what I think it does

Have I missed anything major (or the point completely)?

Regards, Newroad

* please note, in none of the above am I considering risk adjusted returns - something I have discussed separately

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Re: Total Return vs other performance measures?

#433397

Postby JohnB » August 9th, 2021, 9:27 am

For some people, its not just the hassle of selling units, its the raw psychology, as it pains them to do so. Its like a gardener who wants apples but doesn't want to prune the orchard to get firewood. Living off dividends becomes a mantra, even if they want to reject segments of the market that provide better capital returns, they want yield.

Its also much easier to get data on share and index spot prices than TR ones, which helps those who pore over newspapers, annual reports and historical charts. I am not one of those people.

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Re: Total Return vs other performance measures?

#433401

Postby Dod101 » August 9th, 2021, 9:44 am

Depends very much on the aim of the investment in the first place which is of course a point that the OP has not even acknowledged. It might be a long term fund for the benefit of someone in ten years time say. TR is more or less a no brainer then. Or it may be like me that the individual lives off the return from an investment fund. In that case some will go the way of a full blown HYP, concentrating solely on the maximium income that can be derived subject to various individual judgements. I actually go generally for an income portfolio but with that I have quite a number of long term shares for capital growth as well.

As a performance measure though there is much to be said for using Total Return as the measure, in fact it seems to me to be the only sensible one, that is the sum of the yield plus any capital growth/loss.

Dod

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Re: Total Return vs other performance measures?

#433405

Postby Newroad » August 9th, 2021, 9:53 am

Hi Dod.

I'm not seeing the correlation between the aim of the investment and considering the argument that Total Return is (subject to the other factors I listed and perhaps others I've missed) being the only reasonable gauge or measure.

Happy to be enlightened though - feel free to use your 10 years time vs perpetual cases if it helps?

Regards, Newroad

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Re: Total Return vs other performance measures?

#433408

Postby mc2fool » August 9th, 2021, 10:10 am

Newroad wrote:In context, here are the possible reasons I can think of why Total Return might not be the be all and end all of measurement*

    1. Taxation - it may for some people in some jurisdictions better to get (say) dividend income rather than capital appreciation
    2. Excess Administration - it may for some people be preferable to simply sweep up dividend/distribution income rather than have the hassle of regularly selling shares/units
    3. Excess Costs - dealing spreads, or for some sufficiently small pots, transaction costs in general, may make relying on dividends/distributions relatively more attractive
    4. Definition - maybe "Total Return" doesn't mean what I think it does

Your thread topic is "Total Return vs other performance measures?" but you are conflating or confusing measurement with, it seems, income methodology.

In terms of measurement, re (1) I suppose there could be something to be said for measuring net total return, i.e. after taxes, but that does end up being very personal situation dependent, and is also affected by your measurement vs methodology confusion.

I suppose at a stretch you could look at (3) from a net TR view, but it too is very personal situation dependent and is also tied up in your measurement vs methodology confusion.

Re (4), yes, what does it mean? Is it simply individual year on year capital gain plus yield, irrespective of what you did with the dividends -- or the capital? Or is it an annualised dividends reinvested, capital not touched figure? The two are different.

(2) is pure methodology and nothing to do with measurement.

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Re: Total Return vs other performance measures?

#433410

Postby Newroad » August 9th, 2021, 10:17 am

Hi Mc2Fool.

I said measurement and intended measurement (as, in the end, that is what matters). If some of the historic misunderstanding has been confusing measurement with methodology (a word I didn't use) then that would make some sense.

So yes, nothing other than (to use your term) "net total return" is what I intended. If we were all to be able to agree on that (I'm not so sure we can) then great :)

Regards, Newroad

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Re: Total Return vs other performance measures?

#433411

Postby 88V8 » August 9th, 2021, 10:22 am

Newroad wrote:.... by default, nothing other than considering Total Return makes sense to me.

I agree.
In terms of measurement, overall return on capital, absolutely.

But as an investment methodology, a means of generating income which is what I am doing and all I care about.... pfft.
To generate income, having to sell the shares that are generating my income? pfft.
Not for me.

I do sell shares to use up my CGT allowance, but that's as far as it goes or will go.

As mc2 say, it depends ....

V8

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Re: Total Return vs other performance measures?

#433412

Postby Lootman » August 9th, 2021, 10:22 am

Newroad wrote: Taxation - it may for some people in some jurisdictions better to get (say) dividend income rather than capital appreciation

I am far from an expert in global taxation systems, but from what I have seen capital gains are often taxed more leniently. Taking the UK as an example:

1) You get an annual CGT-free allowance of 12 grand or so; dividends it is just 2K.
2) The tax rates applying are 0%, 10% and 20%. Dividends are taxed up to 32% or so.
3) You can control the timing of capital gains usually. But with dividends you have no choice about there being an immediate tax event.
4) Cost basis is stepped up upon death.

The other nation that I am familiar with, the US, also treats capital gains more lightly, although the last time I looked the CGT rate and dividend tax rates there were the same, 15%. You still get control of the timing of gains there. There is still the step-up of cost basis upon death. And the US gives you a choice of FIFO, LIFO, HIFO etc. rather than average cost basis, which can mitigate CGT.

Do you know of any countries that tax capital gains higher than dividends?

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Re: Total Return vs other performance measures?

#433413

Postby Newroad » August 9th, 2021, 10:24 am

Not my area of expertise, Lootman.

But, for example, Australia has (or used to have) the concept of "fully franked" dividends.

Regards, Newroad

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Re: Total Return vs other performance measures?

#433414

Postby Newroad » August 9th, 2021, 10:28 am

Hi 88V8.

All fine with me - but the flip side to that line of argument appears that preferred methodology shouldn't thereafter be used as a defence to (presumed/possible) relative underperformance.

Regards, Newroad

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Re: Total Return vs other performance measures?

#433430

Postby mickeypops » August 9th, 2021, 11:29 am

Good discussion. I’m an income investor, using ITs that pay good dividends to support our retirement. I’ve two other points to add.

1. If the investments are in a SIPP then the taxation of divis v capital gains is not relevant. All withdrawals are taxable.

2. I believe there’s an element of risk reduction. Dividend flows are likely to be less volatile than capital values, especially in ITs that have a reserve from prior years.

MP

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Re: Total Return vs other performance measures?

#433436

Postby Itsallaguess » August 9th, 2021, 11:37 am

Newroad wrote:
I get the sense there have been many debates on this over time, some perhaps heated. I wasn't around for these, so please accept my apology in advance for any ignorance on these matters.

With the above said as a starting point, by default, nothing other than considering Total Return makes sense to me. However, there are some very obviously intelligent people on the forum who appear to think otherwise. Though I can think of some reasons why this might be the case (which I will get to below) it is also possible I'm overlooking something.

In context, here are the possible reasons I can think of why Total Return might not be the be all and end all of measurement*

1. Taxation - it may for some people in some jurisdictions better to get (say) dividend income rather than capital appreciation
2. Excess Administration - it may for some people be preferable to simply sweep up dividend/distribution income rather than have the hassle of regularly selling shares/units
3. Excess Costs - dealing spreads, or for some sufficiently small pots, transaction costs in general, may make relying on dividends/distributions relatively more attractive
4. Definition - maybe "Total Return" doesn't mean what I think it does


Have I missed anything major (or the point completely)?


Does the example below help to explain one of the common issues and misconceptions?

Shopper 1 (TR) - Goes to Tesco in his car, gets a trolley full of shopping, and takes it home.

Shopper 2 (Income) - Goes online to the Tesco website, orders his shopping, and also pays for it to be delivered on one of the afternoon delivery slots.

Shopper 1 (TR) has got the best 'total-return' on his money, because he's got his shopping home manually, and paid cash costs for the shopping only.

Shopper 2 (Income) has got a comparatively worse 'total-return performance' on his money, because not only has he paid for his shopping, but he's also paid for the convenience of getting his shopping delivered to his door at additional cost. However, it's important to note that Shopper 2 (Income) is less interested in 'total return' than he is in the additional convenience of the delivery method, and is happy to 'give up' some total return to take advantage of that convenience.

Shopper 1 (TR) might feel that Shopper 2 (Income) can get a better return on his cash if Shopper 2 (Income) were only willing to go to Tesco himself and get his shopping, rather than paying additional costs for delivery. This is often perplexing to Shopper 1 (TR), as he cannot see the sense in wasting some valuable 'total return' when a better alternative (in his mind...) is clearly available...

Shopper 2 (Income) might feel that he's being harshly judged by Shopper 1 (TR), who is taking no account of the additional convenience that Shooper 2 (Income) is taking advantage of, or appreciating the often valid reasons why such convenience might be suitable for his own personal situation.



Newroad wrote:
Hi 88V8.

All fine with me - but the flip side to that line of argument appears that preferred methodology shouldn't thereafter be used as a defence to (presumed/possible) relative under-performance.


Why would it ever be appropriate to only ever be able to compare the 'total-return' cash costs that Shopper 1 (TR) and Shopper 2 (Income) spend?

If that was all that we ever did, then of course Shopper 2 (Income) would always look stupid, because he'd be spending more overall cash on the same trolley of shopping....

Why would it not be appropriate to also take into account the additional convenience that Shopper 2 (Income) is getting for his additional (lower total-return) costs?

Cheers,

Itsallaguess

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Re: Total Return vs other performance measures?

#433438

Postby Newroad » August 9th, 2021, 11:43 am

It would be entirely reasonable, ItsAllAGuess.

Which is what I was catering for, or attempting to, in "2. Excess Administration". The only theoretic point of interest (perhaps not to all) is the cost of the Reduced Administration.

{Hi MickeyPops} I think your argument, though likely accurate, is a red herring - as the volatility is not directional. To misquote Benjamin Graham, "In the short run, preferred methodology is a voting machine but in the long run {net} total return is the weighing machine".

Regards, Newroad

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Re: Total Return vs other performance measures?

#433444

Postby dealtn » August 9th, 2021, 12:03 pm

Itsallaguess wrote:
Does the example below help to explain one of the common issues and misconceptions?

Shopper 1 (TR) - Goes to Tesco in his car, gets a trolley full of shopping, and takes it home.

Shopper 2 (Income) - Goes online to the Tesco website, orders his shopping, and also pays for it to be delivered on one of the afternoon delivery slots.



Not really.

Shopper 1 looks like an "Income" to me, not TR. He has no choices but to accept what is in the shop at that time, much like the income investor who has only the option of taking the income decided by the (few) Directors at the company in whom he is invested.

Shopper 2 has much more flexibility, orders when is convenient, can adjust the order to take advantage of price changes, takes delivery of what he wants, and when etc. This is TR (as far as I can interpret your analogy), with the investor not beholden to the "income" decisions of others. There may be some small financial cost in this approach of dealing charges (analogous to delivery costs) but also cost benefits from taxation in choosing which tax, income, or capital, to pay, and when.

I guess your example doesn't work very well if 2 people are able to see the complete opposite "investor types" in it.

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Re: Total Return vs other performance measures?

#433445

Postby jackdaww » August 9th, 2021, 12:11 pm

Newroad wrote:Morning, All.

With the above said as a starting point, by default, nothing other than considering Total Return makes sense to me. However, there are some very obviously intelligent people on the forum who appear to think otherwise. Though I can think of some reasons why this might be the case (which I will get to below) it is also possible I'm overlooking something.

Regards, Newroad



==========================================

yes indeed .

perhaps its much more basic.

eg

1. this is what i do , so it must be ok.

2. this is what other highly respected people on here do , so it must be ok.

3. a high yield basket of shares will do better than an annuity , so it must be ok .

4. i am not bothered about getting better results , so thats ok .

5.. other suggestions welcome ...

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Re: Total Return vs other performance measures?

#433446

Postby Alaric » August 9th, 2021, 12:12 pm

Newroad wrote:4. Definition - maybe "Total Return" doesn't mean what I think it does[/list]


There are some contributors to this site who seemingly measure investment performance by the amount of dividend received even when their intention is to reinvest it and thus would choose stocks more on the basis of current dividend yield than outlook for the Company. They don't like to be reminded of the total return method of measurement which might show that their income performance was at the expense of capital. In some respects they are like fixed interest investors in bonds only considering running yield rather than redemption yield.

Whether for the same Total Return an investor would prefer to see it generated by dividend income or by capital growth is another matter with arguments on both sides. Even on administration it may be more work holding a portfolio of multiple shares and receiving dividend income than it would perhaps be to hold an accumulation tracker or fund and sell periodically.

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Re: Total Return vs other performance measures?

#433454

Postby mc2fool » August 9th, 2021, 12:35 pm

Newroad wrote:I said measurement and intended measurement (as, in the end, that is what matters).

Funny, I always thought that in the end what mattered was if your investments were meeting your goals ... giving you enough to live off of, or leaving a big chunk to your beneficiaries, etc, you know, that sort of thing ... :D

Newroad wrote:If some of the historic misunderstanding has been confusing measurement with methodology (a word I didn't use) then that would make some sense.

The confusion/conflation isn't (just) historic, it's in your OP. Indeed, three out of your four "possible reasons" refer to getting/sweeping up dividend income/relying on dividends, which is a portfolio management method for getting money ("an income") out of the portfolio, and (aside from the "net" point) nowt to do with performance measures.

Now, if you want to look at non-performance measures that some folks might consider as or more important than performance ones, then (2), "hassle" would be one (not sure how you measure that in a comparable way though), and of course, the old time favourite that affects us all, how well you sleep at night...

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Re: Total Return vs other performance measures?

#433457

Postby Newroad » August 9th, 2021, 12:42 pm

Hi Mc2Fool.

No, my original post was trying to figure out why people weren't simply focused on {net} total return as a measurement.

Yes, some of the reasons posited why not may relate to methodologic preference, but that didn't (and still doesn't) change the underlying question being asked.

Regards, Newroad

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Re: Total Return vs other performance measures?

#433462

Postby dealtn » August 9th, 2021, 1:11 pm

mc2fool wrote:
Newroad wrote:I said measurement and intended measurement (as, in the end, that is what matters).

Funny, I always thought that in the end what mattered was if your investments were meeting your goals ... giving you enough to live off of, or leaving a big chunk to your beneficiaries, etc, you know, that sort of thing ... :D



Giving you enough to (currently) live off isn't that great a measure of how you will do so in the future though is it? In the end is that important, or not? I would think most would think it was important.

The future is unknown, but only measuring the current (or investing/divesting for the current) is problematic I would have thought.

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Re: Total Return vs other performance measures?

#433464

Postby mc2fool » August 9th, 2021, 1:18 pm

dealtn wrote:
mc2fool wrote:
Newroad wrote:I said measurement and intended measurement (as, in the end, that is what matters).

Funny, I always thought that in the end what mattered was if your investments were meeting your goals ... giving you enough to live off of, or leaving a big chunk to your beneficiaries, etc, you know, that sort of thing ... :D

Giving you enough to (currently) live off isn't that great a measure of how you will do so in the future though is it? In the end is that important, or not? I would think most would think it was important.

Yes, I of course agree, but my comment wasn't restricted to just the present. ;)


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