Understanding how to measure and interpret investment returns is fundamental to evaluating whether your portfolio is on track. Not all return metrics mean the same thing — knowing the difference helps you make better comparisons and avoid misleading headline figures.
Types of Investment Returns
Total return vs price return
Price return: The gain (or loss) in the price of an asset alone.
Total return: Price change plus income (dividends, distributions, interest) received — often reinvested.
For ASX ETFs, dividends are a significant component of long-term returns. An ETF showing 5% price growth plus 4% dividends has a 9% total return — a significant difference. Always compare total return figures when evaluating investments.
Nominal vs real return
Nominal return: The headline return before adjusting for inflation.
Real return: Nominal return minus inflation. The real return is what actually increases your purchasing power.
Example: If your portfolio returns 9% in a year when inflation is 3%, your real return is approximately 6%. Your wealth grew, but only 6% more than the cost of living increased.
The RBA targets inflation of 2–3%. Over the long run, Australian shares have historically delivered real returns of approximately 6–8%/year after inflation.
Annualised return (CAGR)
The Compound Annual Growth Rate (CAGR) smooths a multi-year return into a consistent annual figure, accounting for compounding.
Formula: $$\text{CAGR} = \left(\frac{\text{Ending Value}}{\text{Beginning Value}}\right)^{1/\text{Years}} - 1$$
Example: $50,000 grows to $90,000 over 7 years. $$\text{CAGR} = \left(\frac{90,000}{50,000}\right)^{1/7} - 1 = 1.8^{0.143} - 1 \approx 8.7%$$
CAGR is useful for comparing two investments over the same period but doesn’t account for the timing of contributions and withdrawals.
XIRR (Extended Internal Rate of Return)
XIRR accounts for irregular cash flows (ongoing contributions, dividends reinvested, withdrawals). It is the most accurate measure of your personal portfolio return.
Best tool: Sharesight calculates XIRR automatically. Excel’s =XIRR() function can calculate it manually using a table of cash flows with dates.
Historical Investment Returns — Australian Context
Past performance is not a reliable indicator of future performance.
| Asset class | Historical return (est. long-term annual) |
|---|---|
| Australian shares (ASX 200, total return) | ~9–10%/year |
| Global shares (MSCI World, AUD, total return) | ~9–11%/year |
| Australian property (capital city, capital only) | ~6–8%/year |
| Australian bonds (Bloomberg AusBond) | ~5–6%/year |
| Cash (RBA cash rate average) | ~3–4%/year |
| Inflation (CPI) | ~2.5–3%/year |
These are approximate long-term estimates. Any given decade or year varies significantly — Australian shares fell ~50% in 2008–09 before recovering strongly.
Benchmarking Your Returns
To assess your portfolio performance, compare against a relevant benchmark:
- VAS (ASX 300) — appropriate benchmark if you hold Australian shares
- VGS (MSCI World ex-Aus) — appropriate for international share component
- VDHG 5-year return — useful benchmark for a balanced growth portfolio
If your actively managed fund or stock selection is consistently underperforming its benchmark after fees, that’s a meaningful signal.
What to Look For in Your Portfolio
| Signal | What it may mean |
|---|---|
| Total return well below benchmark | Review fees, individual stock selection, or underperforming asset classes |
| XIRR significantly different from quoted ETF return | Timing of contributions affected your personal return (normal) |
| Strong price return, low total return | Low-yield portfolio; consider whether income or growth is the priority |
| High nominal return but high inflation year | Real return may be more modest |
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Frequently Asked Questions
What is a good annual investment return in Australia? Over long periods, Australian shares have historically returned approximately 9–10%/year in total return. Real returns (after inflation at ~2.5%) are approximately 6–7.5%. For a diversified portfolio including bonds and cash, lower returns should be expected. A personal XIRR of 7–9%/year for a growth-oriented portfolio is generally considered strong.
How do I calculate my investment return in Australia?
The simplest accurate method is XIRR — use Sharesight (automatically calculated) or Excel’s =XIRR() function with a list of cash flows (contributions as negative, ending value as positive, with dates). Simple percent gain ($value today − $invested) / $invested doesn’t account for contribution timing.
Are ASX returns better than global returns? Historically, global returns and Australian returns have been broadly comparable over long periods, though with different periods of outperformance. Australian shares have lower diversification (concentrated in banks and miners) but offer strong franking credit benefits. Most Australian investors include both via VAS + VGS or similar combinations.
This article provides general financial information only. For advice tailored to your situation, speak with a licensed financial adviser through the ASIC financial advisers register or MoneySmart.