What Is Cumulative Return?
A cumulative return on an investment is the aggregate amount that the investment has gained or lost over time, independent of the period of time involved. Presented as a percentage, the cumulative return is the raw mathematical return of the following calculation:
Original Price of Security(Current Price of Security)−(Original Price of Security)
- Expressed as a percentage, cumulative return is the total change in the price of an investment over a set time period—an aggregate return, not an annualized one.
- Reinvesting the dividends or capital gains of an investment impacts its cumulative return.
- Cumulative return figures for mutual typically omit the effect of annual expense ratios and other fees on the fund's performance.
Understanding Cumulative Return
The cumulative return of a stock that does not have a dividend is easily calculated by figuring out the amount of profit or loss over the original price. For example, investing $10,000 in Johnson & Johnson (JNJ) for a 10-year period ending on Dec. 31, 2018, results in $48,922. With no dividends reinvested, this is a total cumulative return of 697.99% or an average of 10.94%; it also includes two stock splits. The value of dividends received during that time period also adds another $13,611 in profit above the original investment.
Calculating the cumulative return for a stock that reinvests dividends is much more difficult. In the Johnson & Johnson example above, reinvesting the dividends nets a total value of $75,626. Cumulative return could be misleading in this scenario because the reinvested aggregate amount is more than the previous example, where the total between the principal of $48,922 and dividends not invested of $13,611 is $62,533.
Reinvesting the dividends increases the investor’s cost basis and reduces cumulative return. For the reinvested example, the stockholder’s cumulative return is 656.26% or an average of 10.64%. When compared, the reinvested amount has a lower cumulative return but really yields more total dollar amount for the investor, with an additional $13,093.
Cumulative Return and Mutual Funds
A common way to present the "effect" of a mutual fund's performance over time is to show the cumulative return with a visual such as a mountain graph. Investors should check to confirm whether interest and/or dividends are included in the cumulative return (the marketing materials or info accompanying an illustration should say); such payouts may be assumed to be reinvested or simply counted as raw dollars when calculating the cumulative return.
One notable difference between mutual funds and stocks is mutual funds sometimes distribute capital gains to the fund holders. This distribution usually comes at the end of a calendar year and consists of the profits the portfolio managers made when closing out holdings. Mutual fund owners have the option to reinvest those capital gains, which can further make calculating the cumulative return more difficult.
Cumulative Return vs. Compound Return
Along with the cumulative return, a mutual fund or other investment usually indicates its compound return. Unlike the cumulative return, the compound return figure is annualized.
While cumulative returns may sound more impressive than the usually smaller annualized rate of return, they typically omit the effect of the annual expenses on the returns an investor will truly receive. Annual expenses an investor may expect include fund total expense ratios, interest rates on loans and management fees. When worked out on a cumulative basis, these fees can substantially eat into cumulative return numbers.