A realized return is the amount of actual gains that is made on the value of a portfolio over a specific evaluation period. This figure takes into consideration any earnings generated by each of the assets contained in the portfolio, as well as any losses that were incurred as a result of a shift in the value of the individual assets. It is also possible to identify the realized return associated with each asset that is held in the portfolio.
There are several reasons why an investor would want to periodically confirm the actual return generated on his or her investments. The first has to do with the stability of the portfolio itself. If the rate of return for the portfolio overall is low or should decrease, this is a sign that some diversification in the types of investments would be a good idea. In the event that the portfolio is already diverse, a loss in return could indicate that one or more of the investment types compose a higher percentage of the overall worth of the collected assets than they should. With both scenarios, noting that the realized return is not what it should be can prompt the investor to make changes before further losses are incurred.
When calculating the realized return on a portfolio that includes bond issues, it is important to focus on the actual interest payments that are received on bond coupon for the period cited. For example, if a bond issue with a ten-year duration offers a 5% annual interest payment, the investor will only include that amount in the return if the payment has already been received. By contrast, the investor will note any increases in the unit price of each share of stock in the portfolio, since that figure reflects the change in the market value of those shares as of the end of the period under consideration.
Employing the calculation of a realized return can go a long way toward helping an investor make decisions about what assets to hold for a little longer, which ones to sell immediately, and when acquiring 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 if the goals set for the investment effort are being met, and the potential impact of buying and selling assets on reaching those goals. As a management tool, knowing the realized return for successive periods can help an investor arrange his or her assets to best effect, and position the portfolio to move onward to the next level of profitability.
