You often hear: "This investment returned 8% last year." Sounds good. But to know whether it really is good news, you need to ask three small questions.
First: what is a return?
A return is what your money earned compared with what you put in. Like an apple tree: you plant it, then count the apples you pick.
Example: Buddy buys a share in a company for CHF 100. During the year, the company pays him CHF 3 (part of its profits), and his share is now worth CHF 105. He has gained 3 + 5 = CHF 8 on CHF 100. His return is 8%.
Trap no. 1: forgetting rising prices
If prices went up by 2% that same year, Buddy's CHF 108 buys less than expected. Once rising prices are taken off, his real gain is only about 5.9%. Economists call this the "real" return: the one that truly counts for what your money can buy.
Trap no. 2: thinking a loss reverses itself
Your investment loses 50% one year, then gains 50% the next. Are you back where you started? No. CHF 100 becomes CHF 50, then CHF 75. A quarter is missing. To make up for losing half, you have to… double. That's why avoiding big falls matters as much as chasing big gains.
Trap no. 3: looking at a single year
One year tells you almost nothing. What counts is the long-run average. A major study calculated what investments earned in 16 rich countries between 1870 and 2015, after rising prices:
- shares and property: about 7% a year;
- bonds (lending to a government): about 2.5% a year;
- short-term money in an account: about 1% a year.
Over 145 years, the difference is huge. But those averages hide very good years and very bad ones. The higher return is the reward for those who accept the bumps and stay on board.
The right reflex
When someone quotes you a return, ask:
- Over how long?
- Before or after fees?
- Before or after rising prices?
And if someone promises you a big return with no risk at all, be wary: it doesn't exist.
Try this tonight with your child
Sow some cress seeds in two pots. One gets water every day, the other every third day. After a week, count the shoots and work it out together: "How many shoots for how many seeds?" Your child has just calculated their first return.
Further reading
- Jordà, Ò., Knoll, K., Kuvshinov, D., Schularick, M. & Taylor, A. M. (2019). The Rate of Return on Everything, 1870–2015. Quarterly Journal of Economics, 134(3), 1225–1298.
Teach them to count the apples. Join the Mangosteen Buddy waitlist: Book 1 of the comic is free, and the first 500 families get their first year of Premium on us (worth CHF 150). Save my place
Educational content, not investment advice. Past returns do not guarantee future returns.