Realized return is the actual gains made on a portfolio during a specific period, taking into account gains and losses of individual assets. It helps investors determine if their investment goals are being met and make decisions about buying and selling assets.
A realized return is the amount of actual gains made on the value of a portfolio during a specified evaluation period. This figure takes into account the gains generated by each of the assets contained in the portfolio, as well as any loss that may have occurred as a result of a change in the value of individual assets. It is also possible to identify the realized return associated with each asset held in the portfolio.
There are several reasons why an investor would want to periodically confirm the actual return generated by their investments. The first has to do with the stability of the portfolio itself. If the overall portfolio rate of return is low or should decline, this is a sign that a good diversification in investment types would be a good idea. In the event that the portfolio is already diverse, a loss in exchange could indicate that one or more of the investment types make up a larger percentage of the total value of the assets raised than they should. With both scenarios, pointing out that the return is not what it should be may prompt the investor to make changes before incurring additional losses.
When calculating the realized return on a portfolio that includes bond issues, it is important to focus on the actual interest payments received on the bond coupon for the period cited. For example, if a ten-year bond issue offers an annual interest payment of 5%, the investor will only include that amount in the yield if the payment has already been received. Rather, the investor will observe any increase in the unit price of each share in the portfolio, as that number reflects the change in the market value of those shares at the end of the period considered.
Using the realized return calculation can be very helpful for an investor in making decisions about which assets to hold for a little longer, which to sell immediately, and when purchasing additional shares or units of a given investment would be a wise choice . By measuring the rate of return over time, it is possible to determine whether the goals set for the investment effort are being met and the potential impact of buying and selling assets to meet those goals. As a management tool, knowing the performance achieved for successive periods can help an investor organize their assets for best effect and position the portfolio to advance to the next level of profitability.
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