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