ROANOKE TIMES
Copyright (c) 1996, Roanoke Times
DATE: Monday, August 26, 1996 TAG: 9608270009
SECTION: MONEY PAGE: 6 EDITION: METRO
SOURCE: MAG POFF STAFF WRITER
Figuring your total return from any investment - a bank certificate, stock, bond or mutual fund - appears simple but can run into some snags if you want to make precise comparisons.
Tyler Pugh, senior vice president and resident manager of Wheat First Butcher Singer in Roanoke, said he believes it's easy to calculate a total return. He defined that as the total change in value of an investment from both income and market fluctuations.
Assume that a stock pays a 5 precent dividend, Pugh said, but the value of the stock drops by 2 percent. In such a case, he said, the total return is 3 percent.
But that figure is not necessarily exact. Nor does it take into account the complexities of a mutual fund to which you might contribute money monthly and reinvest dividends.
Take the most straightforward of all investments, the certificate of deposit (or any other interest-bearing account) at a bank.
Jonathan Cromer, service manager at the Jefferson Street branch of First Union National Bank of Virginia, said virtually all banks will give you two rates.
One is the so-called stated rate, or the percentage of interest applied to the account.
The second is the annual percentage yield which takes into consideration the impact of compounding of interest. The more often the bank applies interest to your money, the higher the yield.
The rate depositors see posted at the bank and written on a certificate is, by law, the percentage return you will receive on your money.
If you take the interest money in periodic checks, you will earn the stated rate.
If, on the other hand, you leave the interest in the bank to earn still more interest, you will have the yield, at maturity.
But both of those are annual figures, Cromer said, yet banks still must quote it when you buy a certificate of deposit for just six months.
You might think that a six-month certificate will earn half the annual yield, but the actual figure will probably be a little less than that because the interest will have less chance to compound. If you invest for less than a year. You'd have to use a calculator to determine your total return.
But at least you don't have to worry about commissions, fees and loads the way you do with stocks, bonds and mutual funds.
You might read, for instance, that a stock has risen by a certain amount, but that's not based on your costs. When you calculate your return on these investments, you must use the amount you paid and the amount you received with the commissions. In the case of mutual funds, the commissions are usually called loads.
Lindsey Quesinberry, vice president at J.C. Bradford & Co. in Roanoke, said most rating services that list total return on stocks make the calculation as if all dividends are reinvested. The dividends would thus buy more shares of stock which, in turn, would earn more dividends.
The typical method of calculating total return, he said, is to add market gain and dividends. Thus, if you buy at $20 a share and sell at $25 (with commissions), you have a gain of 25 percent. If you had dividends of 4 percent, your total return is 29 percent.
But if you invest for more than a year or if you reinvest dividends, you must compound the dividend to get your total return. Quesinberry pointed out that many large companies increase their dividend each year, increasing the complexity of your calculations.
William Nash, manager of the Roanoke office of Scott & Stringfellow, said the average person should make the calculation year by year if possible. Multiple-year figures are too hard to handle, he said, unless you buy a softwear package that performs the math for you.
A statistician would not approve of the simple method, he said, because it does not include the the esoteric concept of the time value of money.
When it comes to a mutual fund, Nash said, you start with the net asset value of the shares and multiply that by the number of shares. You perform the same calculation when you sell and note the gain or loss. The total return is figured by subtracting the smaller number from the larger, then dividing the result by the starting figure.
This assumes that you make a one-time investment in a mutual fund and sell all the shares at once. It also assumes that you don't reinvest the shares.
If you make routine investments in a mutual fund over time or reinvest dividends - the way most people do - you face "tough sledding" in calculating total return, Nash said.
Nash suggested simply calling the fund at its 800 number, using a reference such as Standard & Poors or employing a software package to make the calculation.
Quesinberry said the gain in a mutual fund consists of three components: the capital gain in the market value of the shares themselves, short-term gain on trades made by the fund managers in handling the portfolio and dividend income to the fund.
Each of these is listed separately in the income tax form you receive from the fund, Quesinberry said. In a way mutual funds are easier to handle, he added, because the information about gains or losses is usually included in the quarterly statement.
Bonds, on the other hand, have no gain or loss if they are purchased on the date of issue and held to maturity, Quesinberry said. The entire gain is the amount of interest the bonds earn. But if they are bought and sold sometime between the issue date and maturity, the gain is calculated like that of a stock.
In the case of a bond fund, he added, reinvested dividends raise the cost basis of the fund. He said your cost basis in a bond fund rises every year.
None of these calculations takes taxes into account. The brokers said after-tax figures are too difficult to handle.
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