What is Negative Return?
A negative return is a loss on an investment.
How Does Negative Return Work?
For example, if an investor buys $1,000 of Company XYZ stock and then sells it for $500, the investor has a negative return of 50%.
Similarly, an investor will realize a negative return if the money borrowed to make an investment has a higher interest rate than the rate of return on the investment itself. For example, if you use a mortgage with a 5% interest rate to buy a house that only increases in value by 2% a year, you will have a negative return on your investment.
Why Does Negative Return Matter?
Clearly, every investor wants to avoid negative returns. In some cases, negative returns on certain investments create tax deductions or reductions, but from a cash perspective a negative return means outflows exceed inflows either immediately or over time.