Evaluating your investment strategy.

• Author: Klosterman, Robert J.

If the investment gods have been with you, then you probably are feeling pretty good. Stock prices in particular had another strong year in 1996, with the Standard & Poor's 500 up 22.96% and the Dow up 30.4%. Yet, do you know how well your investments really did or how well they did compared with other investments? This is always difficult, of course, because people don't only invest on the first day of the year and sell on the last day, which is what the various benchmarks measure. Nevertheless, the following primer might give you a better idea of how to measure how well your investments are doing in general.

Yield is the income paid out as interest or dividends divided by the current price of the investment. This usually is expressed as a percentage. A one-year certificate of deposit (CD) annually paying five percent in interest has a yield of five percent. If interest is paid frequently during the year, though, and added to the original investment so you are earning interest on interest, you are receiving an effective or compound yield. Money markets often report an effective yield.

Yield gets more complicated for stocks and bonds because, unlike a CD. their price changes during the year. A stock selling at $100 and annually paying out $5 in dividends per share has a yield of five percent. If the stock price rises to $130, but still pays $5 in dividends, the yield drops to 3.84%. If you hold a bond to maturity (when the principal is due to be repaid to the bondholder), the yield is the same as its interest rate (assuming you are able to reinvest interest payments at the same rate of return). If you sell the bond before maturity, for a smaller or larger price than you paid for it, the yield will change.

Capital gains (or losses). This measures in percentage terms how much an asset gains (or loses) in value over time. It also is referred to as price appreciation (or depreciation), and sometimes, confusingly. as annual return. A stock bought at $50 which rises in value to $60 a year later has appreciated 20%.

Total return. When evaluating before-tax returns of similar or even dissimilar investments, total return generally is considered the best method since it compares apples to apples. Total return is yield plus or minus capital gains and losses. If a stock bought for $100 a share paid out $5 in dividends per share and gained $30 in value during the year, the total return is 35%. A $1,000 bond that pays out $80 in interest, but loses $5 in...