Question 1

What is total investment return?

Accepted Answer

Total return is the full gain from an investment, including both capital growth (increase in the value of your holdings) and income (dividends or interest paid by the investment). When dividends are reinvested rather than taken as cash, they compound over time, buying more units that themselves grow and pay dividends in future years. Over long periods, reinvested dividends can account for more than half of total return.

Question 2

What growth rate should I use?

Accepted Answer

Global equity markets (such as a world index tracker) have historically returned around 7-10% per year in nominal terms before fees, depending on the period. A common split is roughly 5-6% capital growth and 1.5-2.5% dividend yield for a global equity fund. After fund fees (typically 0.1-0.3% for index funds), a reasonable long-run assumption for a diversified equity portfolio is 6-8% total return. For bonds or cash, use lower rates.

Question 3

What is a dividend yield?

Accepted Answer

Dividend yield is the annual dividend income expressed as a percentage of the portfolio value. For example, if your portfolio is worth £10,000 and generates £200 in dividends per year, the yield is 2%. The dividends can either be taken as income or automatically reinvested to buy more shares, which is what this calculator assumes in "reinvested" mode. The UK equity market currently yields around 3-4%.

Question 4

What is CAGR and why does it matter?

Accepted Answer

CAGR (Compound Annual Growth Rate) is the rate at which your investment would have grown if it grew at a steady rate each year. Because contributions are made over time rather than as one lump sum, the CAGR shown here reflects the return relative to total capital invested, which is a more realistic measure than a simple percentage gain. A CAGR of 7% means your money effectively doubled roughly every 10 years.

Question 5

Should I invest in an ISA or a general investment account?

Accepted Answer

For most UK investors, a Stocks and Shares ISA is the best wrapper for long-term investments. All capital gains and dividend income inside an ISA are completely tax-free, and withdrawals are penalty-free. The annual ISA allowance is £20,000. Gains outside an ISA are subject to Capital Gains Tax (18%/24%) and dividends above the £500 allowance are taxed at 8.75-39.35% depending on your income tax band.

Year	Opening value	Contributions	Capital growth	Dividends	Closing value
1	£10,000	£3,600	+£611	+£284	£14,495
2	£14,495	£3,600	+£841	+£379	£19,314
3	£19,314	£3,600	+£1,087	+£480	£24,481
4	£24,481	£3,600	+£1,352	+£589	£30,021
5	£30,021	£3,600	+£1,635	+£705	£35,962

Investment Return Calculator

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