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Financial Planning Competency Handbook, 2nd Edition by CFP Board

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CHAPTER 34 Measures of Investment Returns

Thomas Warschauer, PhD, CFP®

San Diego State University

CONNECTIONS DIAGRAM

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Investment returns are inextricably linked to any financial goal-achievement planning function, including education and retirement goals. Understanding estimates of future returns is meaningless without understanding risks involved. The basis for investment returns rests on economic growth: that of the firm or specific project and that of the economy. Returns interact with time value calculations, valuation, portfolio, and allocation models. Returns encountered by clients are real after-tax returns, and so tax considerations are very important. Finally, consumer protection laws sometimes prescribe how returns should be stated most fairly.

INTRODUCTION

The concept of investment return is simple in nature but complex in implementation. Ex post (in the past), higher returns are always better than lower returns, no matter how they are calculated. But the investments field deals with the future (ex ante returns), not the past, and that is where it gets more complex. In the investment world, higher anticipated returns are usually accompanied by more uncertainty.

What investors care about is return, sure enough. But they are interested in the spending power of what they actually get. Investors often must share their returns with the government through taxation. Returns ...

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