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Annualised return and CAGR
Equivalent yearly compound return. CAGR means compound annual growth rate: with no external flows, it connects starting and ending capital without describing each year. Contributions/withdrawals require a flow-aware method.
Arithmetic average return
Period returns summed and divided by their count. It does not describe compounded wealth: each successive investment return acts on a changed base.
Capital gain or loss
Value change relative to purchase cost. Selling realises it; unrealised changes still affect current worth. Tax definitions and cost adjustments depend on local rules.
Compounding
Successive returns applying to capital still invested, including earlier returns. Retained interest can earn interest; market losses compound too. New contributions are savings, not a return from compounding.
Contribution
Money or investments crossing into the measured portfolio from outside. It adds resources without creating investment gain. Purchases using cash already inside are internal transactions.
Cumulative return
Return for the whole stated period, rather than each year within it. External contributions/withdrawals require an appropriate calculation; a balance increase alone is not a return.
Dollar-cost averaging
Equal investments at regular intervals without price-based rescheduling. New earnings and phased investment of an existing lump sum have different starting cash. Neither guarantees lower purchase costs or prevents losses.
Emergency reserve
Money for plausible unplanned expenses or income interruptions, sized for the circumstances and accessible/stable when needed. Known bills are planned spending; reserve and investments cannot claim the same money.
External cash flow
Money/investments crossing the measured portfolio boundary. A broker transfer is external to each account but internal to a portfolio containing both. Retained dividends are investment income, not contributions.
Inflation and purchasing power
Inflation is a rise in the general price level; purchasing power is what money buys. Unchanged money buys less of a rising-price basket. Personal costs can diverge from the official index.
Investing
Committing money for expected economic benefit while accepting uncertainty. The claim, purchase price and losses matter; long ownership alone does not establish sound value or funding for the goal.
Investment income
Payments from an investment, such as interest/dividends. Income forms part of total return; receiving it does not establish an overall value or purchasing-power gain.
Liability
A financial obligation. Its balance reduces net worth; payment dates/terms affect the ability to meet bills. Valuable assets need not provide cash when the obligation falls due.
Lump-sum investing
Investing already available money at once, compared with phased entry into the same intended allocation. Earlier entry takes that allocation’s risk sooner; neither schedule guarantees a better outcome.
Money-weighted return (MWR)
Return reflecting external cash-flow amounts and dates: the invested money’s experience. Often calculated as IRR (internal rate of return), with XIRR for irregular dates; not gain divided by contributions.
Money-weighted and time-weighted returns
Net worth
Assets minus liabilities at a stated date. Home equity already deducts its mortgage; adding full home value again double counts. Restricted/illiquid assets count as wealth without being spendable cash.
Nominal return
Money return before inflation adjustment. A positive result can still lose purchasing power. Currency and cost treatment remain part of its definition.
Percentage point
The difference between percentages. Moving from 4% to 5% adds one percentage point but raises the rate 25% relative to its original value; this is not an account return.
Principal (initial capital)
The original amount invested in the handbook’s savings examples, distinct from current capital after contributions and returns. Preserving nominal principal does not ensure preserved purchasing power.
Real return
Inflation-adjusted return measuring purchasing-power change for the same period and currency. Subtracting inflation from nominal return is an approximation.
Exact real-return formula
(1 + nominal return) ÷ (1 + inflation) − 1, using decimal rates.
The purchasing-power calculation
Saving
Setting aside income rather than spending it; holding cash, repaying debt or investing comes next. “Savings” also means accumulated wealth. “Cash savings” here emphasises spending access and relative stability.
Speculation
Here, relying heavily on a favourable price move without grounded purchase-price reasoning or an acceptable fallback. The investing boundary is imperfect; labels and long intended ownership do not settle it.
Time-weighted return (TWR)
Return linking subperiods around external flows to remove their size/timing effects. Useful for comparing investment performance; the investor’s money-weighted experience can differ because money entered on different dates.
Total return
Income plus gain/loss in value. Price alone omits payments; payment alone omits value change. Specify reinvestment, costs and tax before comparing figures.
Withdrawal
Money/investments leaving the measured portfolio. It reduces invested resources without being an investment loss. Selling and retaining cash inside is an internal transaction.
External and internal movements