What Is Estimated Long-Term Return?
Estimated long-term return is a hypothetical measure that forecasts an investor's expected return over the life of an investment and is typically quoted for fixed-income investments with a fixed duration.
Key Takeaways
- Estimated long-term return is a hypothetical measure that forecasts an investor's expected return over the life of an investment and is typically quoted for fixed-income investments with a fixed duration.
- Typically, the estimated long-term return is calculated as a yearly rate of return over a specified time frame and is often presented net of estimated fees.
- Estimated long-term return can be comparable to a savings account rate or the rate of interest quoted for a certificate of deposit.
Understanding Estimated Long-Term Return
Estimated long-term return is a metric that provides investors with a return estimate they can target when investing in a fund over a long-term time frame. This measure can be comparable to a savings account rate or the rate of interest quoted for a certificate of deposit. Generally, fund managers reporting estimated long-term return will be able to arrive at this calculation because the underlying fund investments have a specified return that is given at the time of initial investment.
Many fixed-income funds may choose to disclose estimated long-term return in their registration documentation and marketing materials. Proposals have also been made to provide this information in the Form S-6, which is the registration statement filing for unit investment trusts (UIT), though no final rules have been dispersed.
Unit investment trusts, and specifically UIT portfolios with a high allocation to fixed-income investments, can provide an ideal vehicle for estimated long-term return disclosure. These investments are one of three formal investment companies regulated by legislation from the Investment Company Act of 1940. These investments are created through a trust structure and issued with a fixed maturity date. In the realm of fixed income these investments can be a good alternative to high-yield savings accounts and certificates of deposit.
Overall, estimated long-term return disclosure can be a marketing measure, easily quoted by fixed-income funds, that can increase marketability. Most funds will have a higher estimated long-term return than high-yield savings accounts or certificates of deposit which can draw investors seeking low-risk fixed-income investments.
Estimated Long-Term Return Calculation
Typically, the estimated long-term return is calculated as a yearly rate of return over a specified time frame. It is often presented net of estimated fees. In fixed-income portfolios it can easily be based on the yields of all the underlying securities in a portfolio. In this case, it is usually weighted to account for each security's market value and maturity.
The estimated long-term return can be a helpful point of consideration when planning on investing in a fixed-income product over the long term. It can give a fairly accurate estimation of the return on the portfolio. It is also similar to the yield to maturity measure of a single bond extended to a portfolio, with some adjustments.
FAQs
Estimated Long-Term Return Calculation
How do you calculate long term return? ›
To calculate the total return rate (which is needed to calculate the annualized return), the investor will perform the following formula: (ending value - beginning value) / beginning value, or (5000 - 2000) / 2000 = 1.5. This gives the investor a total return rate of 1.5.
How do you calculate estimated return? ›
12 For example, if an investment has a 50% chance of gaining 20% and a 50% chance of losing 10%, the expected return would be 5% = (50% x 20% + 50% x -10% = 5%). The expected return is usually based on historical data and is therefore not guaranteed into the future; however, it does often set reasonable expectations.
How to calculate ROI formula? ›
Key Takeaways
Return on investment (ROI) is an approximate measure of an investment's profitability. ROI is calculated by subtracting the initial cost of the investment from its final value, then dividing this new number by the cost of the investment, and finally, multiplying it by 100.
How do you calculate estimated return on a loan? ›
To account for the time value of money and the level of risk involved, discount future returns to their present value using an appropriate discount rate. Now it's finally time to calculate the ROI! Apply the ROI formula: ROI = (Total Returns – Total Cost) / Total Cost * 100.
What is long-term return estimates? ›
Estimated long-term return is a hypothetical measure that forecasts an investor's expected return over the life of an investment and is typically quoted for fixed-income investments with a fixed duration.
How much do I need to invest to make $1000 a month? ›
A stock portfolio focused on dividends can generate $1,000 per month or more in perpetual passive income, Mircea Iosif wrote on Medium. “For example, at a 4% dividend yield, you would need a portfolio worth $300,000.
How to calculate total return? ›
The formula for calculating total return is Total Return = (Ending Value – Beginning Value + Dividends or Interest) / Beginning Value * 100.
What is the rate of return on a security that costs $1000 and returns $2000 after 5 years? ›
Answer and Explanation:
The calculated value of the rate of return is 14.87%.
How to calculate percentage return? ›
Calculating your return rate
To calculate your return rate, divide the number of units returned by the number of units sold, multiplying the product by 100 to find your percentage. For example, if you sold 100 widgets, and 10 widgets were returned, you would divide 10 by 100, which equals 0.1.
The expected return is calculated by multiplying the probability of each possible return scenario by its corresponding value and then adding up the products.
What is a good estimated rate of return? ›
General ROI: A positive ROI is generally considered good, with a normal ROI of 5-7% often seen as a reasonable expectation. However, a strong general ROI is something greater than 10%.
How do you calculate actual return? ›
You can calculate the rate of return on your investment by comparing the difference between its current value and its initial value, and then dividing the result by its initial value. Multiplying the result of that rate of return formula by 100 will net you your rate of return as a percentage.
What is the formula for return on long-term debt? ›
Return on debt is simply annual net income divided by average long-term debt (beginning of the year debt plus end of year debt divided by two).
How do you calculate long-term Roe? ›
To calculate ROE, one would divide net income by shareholder equity. The higher the ROE, the more efficient a company's management is at generating income and growth from its equity financing.
How do you calculate long-term value? ›
The customer lifetime value formula is Customer Lifetime Value = Customer Value x Average Customer Lifespan. The CLV result is the revenue you expect an average customer to generate during their relationship with your business. Typically, lifetime value (LTV) calculates the overall value of all customers.
How do you calculate long-term and short term? ›
What is short-term capital gain? Short-Term Capital Gains are those that you earn on selling an asset within 36 months (3 years) from the date you bought it. What is long-term capital gain? Long-Term Capital Gains are those that you earn on selling an asset after 36 months (3 years) from the date you bought it.
