A:

Knowing whether a fund manager or broker is doing a good job can be a challenge for some investors. It's difficult to define what good is, because it depends on how the rest of the market has been performing. For example in a bull market, 2% is a horrible return. But in a bear market, when most investors are down 20%, just preserving your capital would be considered a triumph. In that case, 2% doesn't look so bad.

So, the absolute return is simply whatever an asset or portfolio returned over a certain period. In the paragraph above, the 2% we mentioned would be the absolute return. If a mutual fund returned 8% last year, then that 8% would be its absolute return. Pretty simple stuff.

Relative return, on the other hand, is the difference between the absolute return and the performance of the market (or other similar investments), which is gauged by a benchmark, or index, such as the S&P 500. Relative return is the reason why a 2% return is bad in a bull market and good in a bear market. (If you aren't familiar with indexes, read more on them in our Index Investing tutorial).

Relative return is important because it is a way to measure the performance of actively managed funds, which should get a return greater than that of the market. After all, you can always buy an index fund that has a low management expense ratio (MER) and will guarantee the market return. If you're paying a manager to perform better than the market and the investment doesn't have a positive relative return over a long period of time, it may be worth your time shopping around for a new fund manager.

Absolute return does not say much on it's own. You need to look at the relative return to see how an investment's return compares to other similar investments. Once you have a comparable benchmark in which to measure your investment's return, you can then make a decision of whether your investment is doing well or poorly and act accordingly. (For further reading on returns, check out our article The Truth Behind Mutual Fund Returns.)

RELATED FAQS
  1. What is a good annual return for a mutual fund?

    Explore the question of what constitutes a good annual return from investing in mutual funds and the factors that affect ... Read Answer >>
  2. How do you calculate the excess return of an ETF or indexed mutual fund?

    Read about how to calculate and interpret the expected return generated by an exchange-traded fund (ETF) and an indexed mutual ... Read Answer >>
Related Articles
  1. Investing

    What are Excess Returns?

    Excess returns are investment returns that exceed a benchmark or index with similar risk.
  2. Investing

    What Returns Can You Expect in the Stock Market?

    Looking at the historical returns of the stock market helps you understand current stock returns.
  3. Financial Advisor

    Why the Top-Performing Fund Isn’t the Best Choice

    The top-performing mutual fund or ETF isn't often the best choice for your portfolio. Here's why.
  4. Investing

    Explaining Expected Return

    The expected return is a tool used to determine whether or not an investment has a positive or negative average net outcome.
  5. Investing

    Your Mutual Fund: It's Riskier Than You Think

    Fund managers often take on more risk than they should, putting business ahead of fund holders' interests.
  6. Retirement

    Can Your Retirement Portfolio Rely on High Rates of Return?

    Some experts speculate that stock market returns may be headed downward and investors should strategize accordingly. But are they right?
  7. Investing

    Analyzing Mutual Funds For Maximum Return

    Using a few simple metrics will help you pick the right fund for your portfolio.
  8. Investing

    How to Evaluate Stock Performance

    Learn how to evaluate stock performance. While what you look for in a stock could be different from another person, the way you analyze performance is the same.
  9. Investing

    Quantitative Analysis Of Hedge Funds

    Hedge fund analysis requires more than just the metrics used to analyze mutual funds.
RELATED TERMS
  1. Absolute Return

    The return that an asset achieves over a certain period of time. ...
  2. Relative Return

    The return that an asset achieves over a period of time compared ...
  3. Return

    The gain or loss of a security in a particular period. The return ...
  4. Absolute Return Index

    A stock index designed to measure absolute returns. The absolute ...
  5. Active Return

    The percentage gain or loss of an investment relative to the ...
  6. Absolute Percentage Growth

    An increase in the value of an asset or account expressed in ...
Hot Definitions
  1. Block (Bitcoin Block)

    Blocks are files where data pertaining to the Bitcoin network is permanently recorded.
  2. Fintech

    Fintech is a portmanteau of financial technology that describes an emerging financial services sector in the 21st century.
  3. Ex-Dividend

    A classification of trading shares when a declared dividend belongs to the seller rather than the buyer. A stock will be ...
  4. Debt Security

    Any debt instrument that can be bought or sold between two parties and has basic terms defined, such as notional amount (amount ...
  5. Taxable Income

    Taxable income is described as gross income or adjusted gross income minus any deductions, exemptions or other adjustments ...
  6. Chartered Financial Analyst - CFA

    A professional designation given by the CFA Institute (formerly AIMR) that measures the competence and integrity of financial ...
Trading Center