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.)

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RELATED TERMS
  1. Absolute Return

    Absolute return is the percent that an asset rises or declines ...
  2. Relative Return

    Relative return is the return an asset achieves over a period ...
  3. NAV Return

    The NAV return is the change in the net asset value of a mutual ...
  4. Gross Rate of Return

    Gross rate of return is the total rate of return on an investment ...
  5. Annualized Total Return

    Annualized total return gives the yearly return of a fund calculated ...
  6. Total Return

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