What is a Total Return Index?

The total return index is a tool that is used to calculate the overall performance of a selected group of stocks. Part of the criteria for the stock performance is the assumption that all distributions and dividends associated with the stocks are reinvested. This approach is considered to provide a more complete picture of the actual return, or lack thereof, that is ultimately obtained by the performance of the stocks involved.

There are several reputable indexes in common use today. The S&P 500, issued and updated by Standard and Poor, is often considered the standard for calculating a total return index. However, there are two other commonly employed indexes that are often consulted in tandem with the S&P 500, as well as used independently. Both the Russell 2000 and the Wilshire 5000 are readily available for review.

One of the advantages of consulting more than one total return index is that the three leading indices in use today do not always totally agree on the performance level of a given group of stocks. Investors can sometimes discover helpful information in interpreting various factors associated with the stocks by considering the approach used by each of the difference indices. At other times, there will be widespread agreement between the indices. When this occurs, the investor can be very confident in the conclusions indicated by the collective opinion of the cited indices.

As with most investment tools today, it is possible to access a total return index online. Because the indices are updated continually, investors can consult them at any time of the trading day and get calculations that are based on the latest information. Because of the degree of detail that goes into the construction of a total return index, investors often find them extremely helpful when making a decision to buy stocks, since the index provides a solid basis for projecting future performance.

At the same time, a total return index can help an investor know when to hold or sell stocks that are already part of the portfolio. Shifts over time in the calculations reported in the index may indicate that the stocks are headed for a downward turn. In situations of this nature, the investor may choose to sell now rather than risk eroding any return already earned.