Total return is the money you make when you invest in an asset. It has two parts. First, the investment can provide steady payments at regular intervals, known as dividends in the case of stock and interest in the case of bonds. Second, you might benefit from capital appreciation, which is the money you make when the asset increases in value and you sell it for more than you paid for it. Thus the total return on an investment includes both the payments the investment produces as well as the increase in the asset's value. If the value of the asset decreases, the total return is the payments you receive from the asset minus the drop in its value.

Net return is the total return minus all the costs associated with the investment. Each time you buy or sell an asset you usually pay a commission that reduces your return. When you sell an asset, you'll also likely have to pay taxes on the profit (the money you make). The costs of investing are often overlooked by investors. But a dollar saved on costs is just as important as a dollar made in profits.

The time value of money is the idea that a dollar you receive today is better than the dollar you receive next year, and it's almost infinitely better than a dollar you get fifty years from now. That's partly because a dollar loses its value because of inflation: prices for most things keep on going up. Another reason is that the dollar you have today, unlike the one you get next year, can be invested to yield (produce) dividends or interest. So when you evaluate an investment, it's not only how big the return is, but when those dollars are received, that's of prime importance.

Compounding is directly related to the time value of money: Over time, the process of making interest on interest powerfully increases your investment. Suppose you make a $100 investment that pays 5% interest each year and the principal (the $100 you invested) stays the same. At the end of the first year you have $100 + 5% of $100, or $105. At the end of the second year, you'd have $105 X 105%, or $110.25. In other words, at the end of the second year you'd have (a) your original $100, (b) the $5 you made in the first year, (c) the $5 you made in the second year, and (d) 5% of the $5 you made in the first year, or $.25. Thus the interest pays interest, or compounds. At first your investment grows only slowly, but over time all that interest paying interest adds up -- especially after 30 or 40 years.

Risk versus reward is the concept that the riskier an investment is (i.e., the more likely it is to decline in value), the greater the potential return. Prudent investors try to balance risk and reward. They take reasonable risks that preserve most of their principal and make steady, reliable returns.

Paper profits versus realized profits Suppose you buy an asset for $5 and find out the next day you can sell it at $7. You made a paper profit of $2: you could sell the stock for two dollars more than you paid for it but you haven't yet done so. If you sold the stock for $7, you would have a realized profit of $2. Even sophisticated investors can forget that paper profits can easily evaporate - the price could fall back to $5 the next day -- and that only realized profits put money in your pocket.