How do returns work?

You invest to get a return on your money, but what does that exactly mean? We explain how investments earn returns.

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Written by James
Updated over a week ago

In this article we look at returns from your investments and what kind of returns you could see from investing.

​Please note: Chip can't provide financial advice so you may want to seek guidance from a qualified professional if you are unsure or have detailed questions around investing. Your capital is at risk

What are returns?

Returns are where the value of your investments increase in value (known in the industry as a ‘capital gain’), or you get paid a dividend, or anything else where you end up with more money in return for investing.

With our investment funds you will see a return by the value of the units you have purchased increasing.

How do investment funds generate a return?

Investment fund managers invest in things that are expected to increase in value, or pay a dividend (for equities), or a coupon (for bonds). For example, the BlackRock Consensus Funds invest in a mixture of stocks and shares, as well as bonds.

What kind of returns can I expect to see?

There is no guarantee of returns with investing, but it is likely that over the medium-long term you will see some return on a diversified investment fund.

The returns from investing also compound, meaning you earn returns on the money you’ve earned as a return, so the growth can be exponential.

Of course, as we’ve explained elsewhere, investing is a long term commitment and you will see years where growth is low, stagnant, or negative. Just make sure you’re keeping a 5+ year view on things and even consider spreading your money across multiple funds (for more on this see ‘can the value of my investment go down as well as up?’).

We list the average annual return for each of the BlackRock funds and you can find this alongside past performance information before you decide to invest in any funds. Past performance is not a reliable guide to future returns.

What are average annual returns?

The average annual return is a percentage that shows the average increase in value of a fund over the last five years.

How do we calculate this?

It is calculated using the annual return of the fund over the previous five years, or the lifetime of the fund (if available for less than five years), and then averaging that number.

We get this information directly from the fund manager at BlackRock and you can find full past performance details in the fund’s Key Investor Information Document (KIID).

Example: how average annual returns are calculated*

For example, let’s say we have a fund valued at £1,000.

  • In year 1 this £1,000 grows by 4%, so is now worth £1,040

  • In year 2 this £1,040 grows by 6%, so is now worth £1,102

  • In year 3 this £1,102 shrinks by -4%, so is now worth £1,058

  • In year 4 this £1,058, grows by 8%, so is now worth £1,143

  • In year 5 this £1,143 grows by 5%, so is now worth £1,200

The average annual return takes the percentage growth for each year and averages this.

So for this example the average annual return is: (4% + 6% + -4% + 8% + 5%) ÷ 5 years = 3.8% growth a year.

* Your capital is at risk - Remember your Capital is at Risk and past performance is not a reliable guide to future returns. The value of your investment can go down as well as up and you might get back less than you originally invested.

Is the average annual return the return I will get?

The average annual return is simply a reflection of how a fund has performed in the past and is not a guarantee of the return you will see.

Remember, past performance is not a reliable guide to returns, and should not be the only thing you consider when selecting a fund.

You should carefully consider the risk profile before investing in a fund and understand that as a general rule, the higher the returns the greater the risk.

What is past performance?

Past performance is a measure of much a fund has grown in value previously.

You can usually see this expressed as a percentage figure looking at growth in value in the last year, over the last 3 years and the last 5 years, or over the entire lifetime of the fund.

Why doesn’t past performance equal future performance?

Whilst past performance can be illustrative of how an investment has performed, you cannot predict the future when it comes to investing.

There are a number of reasons why the future performance of investments can’t be relied upon, but mainly it’s to do with the volatile nature of stock markets, which have any number of political, social, economic and even environmental influences, that cannot be anticipated. For example, the COVID-19 pandemic took the world by surprise and caused significant economic disruption in 2020.

Investment funds try to mitigate the risks of adverse performance in a particular market or sector by investing in a wide range of assets though this is not always possible. This is called diversification.

Can the value of my investments go down as well as up?

Yes. All investing carries an element of risk, which means not only may the value of your investment go down, but you could lose the money you have invested.

Of course, multi-asset investment funds do mitigate this risk by investing in a wide range of assets, making it less likely that you will lose everything.

However, it is likely that you will see bad years as well as good years, where the growth in value of the fund is lower or stagnant, and it can also even be negative, i.e. it will fall in value.

The important thing to remember is that investment funds are a medium-long term investment, and it is more likely over the long term (i.e. over 5+ years) that an investment fund spread in markets across the world may increase in value, but do bear in mind that past performance is not a reliable guide to future returns.

How do you work out the return on my investment? / What is the time-weighted rate of return?

We use an industry-standard method to work out your personal rate of return.

It takes into account;

  • the value of your initial investment at the beginning of a period (i.e. start of the year);

  • the value at the end of the period (i.e. end of the year);

  • all the money you take in and out of the fund during that time;

  • and the length of time your money was in the fund.

It is widely considered one of the most accurate ways to reflect returns and is recommended by the Global Investment Performance Standards (GIPS), as a way to help investment returns be calculated consistently around the world.

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