Four terms to help you understand investment performance

Get to know these four investment performance terms

To show you how your investments are performing, each fund provides you with a fund fact sheet. You can download or view fund fact sheets online by logging in to your retirement account from your plan provider’s website or mobile app. We'll explain four common terms used to describe investment performance on fact sheets and how they can help you decide how to best maximize your retirement savings.

1 Rate of return

You can measure the performance of your investment over a specific period by looking at its rate of return. It’s usually shown as a percentage, which represents how much a fund has gained (profit) or lost (loss) compared to its costs. When the fund shows a gain, that’s the percentage your investment has earned for you (your rate of return). 

For example, if you invest $10,000 in a fund and it shows an annual rate of return of 10% after a year, you'd earn $1,000 on your money. The fund’s rate of return is calculated before any fees or expenses are taken out. 

If you leave your money invested for more than a year, the $1,000 you earned will also earn interest. That’s called compound interest. In the example, you have a total of $11,000 invested at the start of the second year. If the fund’s annual rate of return is still 10%, you’ll earn $1,100 at the end of year two, which is $100 more than what you earned in year one. The potential benefits of compounding are greater the longer your money is invested, which is why it’s helpful to invest early and stay invested over the long run. 

This example is for illustrative purposes only and does not represent any particular investment. Individual circumstances may vary, and this may not be reflective of your situation. 

2 Average annual total returns

Now that you know what returns mean, you can look at them across different time periods. The average annual total return table will usually show your fund’s returns for its most recent quarter, 1-, 3-, 5-, and 10-year periods, and since the fund was created. While past performance doesn’t guarantee that you’ll make money in the future, return data can tell you:

• How consistently your fund generates returns
• The types of returns you can expect from your fund over time
• How your fund performed compared to a set standard called its benchmark
• If your fund performed better, worse, or the same as other funds 
• If your fund return meets your expectations 

3 Expense ratio

Most funds have expenses, and it’s helpful to see how your fund’s expenses compare with others. An expense ratio tells you what percentage of your total investment will be used to cover that fund’s daily costs, such as management fees and administrative costs.

Expense ratios are shown over the same periods as the fund’s average annual total returns. A lower expense ratio means more of your money is being invested. A higher expense ratio reduces your rate of return. You should regularly review your fund’s expenses, which can change over time.

4 Risks

A risk is any factor that may affect your fund’s ability to generate a return. You should consider all risks before investing, and you’ll find them listed on all fund materials. They can be broad and apply to many other funds, such as changes in general economic conditions or market fluctuations, as well as be fund-specific, such as declining consumer demand for a company’s or industry’s products. 

Remember that all investments have risks, and there's no certainty you won’t lose your money; however, you can find funds that match your comfort level for risk and desire for returns. Keep in mind, the further you are away from retirement, the more time you’ll generally have to recoup any losses from your investments. 

Review your retirement funds

Now that you understand some key terms involved in investment performance, you can start reviewing the funds in your retirement account. Once you log in to your plan provider’s website or mobile app, you can look at your online investment portfolio. Your portfolio shows you the names of the funds you've selected for investment and the percentage of your contributions allocated to each one. Click on a fund name to get more information, including the fund’s fact sheet. You can determine if the fund’s returns, risks, and expenses are helping you reach your savings goals and make any changes. If you need advice, you may want to contact a financial professional.