Total Return = Gains + Income – Losses – Expenses
Everyday, I’m bombarded by countless ads from fund companies claiming their funds or strategies are the best way to invest my money.
- “You should only invest in index funds because they have the lower expenses than traditional mutual funds.”
- “You should hire us as your money manager because we have lower volatility than comparable index funds.”
- “Invest in our fund, it has a high yield!”
- “Buy our newsletter! The last trade we announced doubled in value in two weeks!”
No matter the source of the add (on-line, radio, magazine, etc.) or the pitch (buy our strategy, buy our funds, etc.) it seems every pitch seems to focus your attention on a piece of the total return formula and not the entire formula.
If my entire focus was on generating the most INCOME, I would buy the lowest credit quality, farthest from maturity bond I could find. That bond might generate a high yield now, but it could also open me up to a potentially large loss and wipe out any gain I might make.
If my entire focus was on preventing LOSSES, I would put all of my money into money market funds and thus only open myself up to loss from inflation.
My focus is not on any one part of the equation but on the entire equation: TOTAL RETURN = GAINS + INCOME – LOSSES – EXPENSES
You and I have no control over if our investments earn any GAINS but we do have control over the EXPENSES we choose to pay and some control via investment selection and monitoring of the INCOME we earn from our investments and any LOSSES they experience.
