subject: Healthy Rate of Return [print this page] Healthy Rate of Return Healthy Rate of Return
Healthy Rate of Return
There was unanimous agreementwhich must be expected by thereaders of this bookthat it is desirable to evaluate performance intwo dimensions: rate of return and risk. After an introductory article,the second article of the report discusses measuring the rate of return.
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The authors unanimously agreed that the rate of return shouldbe based upon changes in the market value of assets held and the value of dividends, interest, and other payments received. (It ispleasant to reflect that it is no longer necessary, for most purposes,.to discuss the book value of assets.) In some contexts it may be necessary to distinguish between dollars in the form of interest and dividendsand dollars in the form of capital gains. Clearly, it is returns aftertaxes which matter to the investor. When taxes exist and are differentfor different kinds of dollars, returns from the various sources mustbe segregated to allow accurate computation of relevant taxes. Alsotrustees of personal trusts must deal even-handedly with lifetime beneficiaries and "remaindermen." Lifetime beneficiaries receiveincome (dividends, interest, and so forth), and remaindermen receiveprincipal. Trustees must choose investments which divide the total returnin a reasonable way between the conflicting claims of the two classesof beneficiaries.
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Similarly, many trustees of endowed institutions feel that they are legally proscribed from spending principal or capital gains. Trusteesfeeling such legal constraints understandably prize income dollars morehighly than other dollars since the former can be either spent or reinvested while the latter cannot be spent.
