Over the last two decades, total return has been popular as an easy way to compare investment results. Total return includes income from dividends and interest, as well as appreciation or depreciation over a given time period, perhaps a number of years.

But more often than not, total return has been inappropriately used to compare different asset classes, products and strategies on a purely absolute basis-even though the comparisons mean very little. Among institutional investors such as schools and universities, pensions and nonprofits, the concept of using total return to compare various asset classes has become the norm.

The Bank Administration Institute started this trend in the early 1970s by releasing formulas for calculating rates of return, which included time weighted rates of return, which were the precursor to absolute total return analysis.1 This was useful for ranking competing investment projects (in theory, the higher the time-weighted rate of return, the better the project). Similarly, total return, in the early days, was designed to support the institutional marketplace and was never intended for use in the individual retail investment marketplace.

In the early days, before the passage of ERISA, many company pension funds were casually turned over to a corporation's CFO or another top executive to manage on a part-time basis while also fulfilling his full-time managerial duties. Not surprisingly, once ERISA was passed, these corporate executives and business owners discovered the negative aspects of being saddled with the fiduciary responsibilities of pension fund management. "We have a real problem," they realized. "If the funds lose money, we can be held personally liable." It was this legal vulnerability that led to the trend of hiring outside investment management firms and consultants to oversee the funds.

The stated motivation of these corporate chieftains--when they delegated to others the responsibilities of pension fund management--may have been to grow and protect their funds' assets, but the real core issue was their potential liability in the event the funds lost money. The solution to their dilemma was provided by investment consultants who offered new performance and benchmarking comparison tools that protected plan fiduciaries while allowing them to comply with ERISA.

Now these generally accepted measurement standards and practices-even though they were originally designed for institutions and the protection of corporate officers and plan fiduciaries-have spawned an entire industry, and their use has been broadened. They are now not only used to provide protection in down markets, but also used by financial advisors to compare absolute investment returns in the retail marketplace and add value. For example, if the market were down 15%, but your company's fund was down only 10%, these new tools have enabled performance comparison and analysis, and thus allowed the fund to show up in the top quartile of its peers, even though absolute performance may have been negative. This new practice has gained widespread acceptance in both the institutional and retail markets.

However, these institutional tools were originally only used among tax-free organizations. When they became more prevalent in the retail marketplace, they became widely misused, since the comparisons rarely incorporated tax considerations. As a result, in their original form, the comparisons weren't that relevant to individual investors (even though the investors thought they were) because they did not accurately measure absolute risk. Individual investors were primarily concerned about whether their money was growing at all, not how it was growing relative to other investment alternatives.

The changing demographics are only exacerbating this issue as baby boomers are now focused primarily on accumulating and/or preserving money for an extended period of retirement. Without considering other aspects of investment return, including taxes, inflation and investment expenses, investors may unknowingly be misled into believing they have adequate resources or that they are achieving satisfactory total returns in absolute terms, when, in reality, they are not. If they seek funds with the best total return without considering all aspects of total return, they may find themselves with inadequate growth of real wealth and insufficient assets at a time when they need assets the most-during retirement.

As the baby boomers become more sophisticated investors, they will have greater amounts of money to deal with. They will learn, as have the very wealthiest people in the country, that it's not how much you earn - it's how much you keep. Instead of using total return as a basis for evaluating investment returns, they will need to evaluate their returns after taxes, after expenses and after inflation. This is sometimes referred to as "real, real returns," and was at a technique developed at my old employer,Thornburg Investment Management, the creator of a 14-year study on investment returns.

These "Real, Real Returns" study will help you explain to your clients aspects of total return that are extremely relevant to their circumstances and financial goals and objectives.  (See Figure 1.)

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