Investment Return Calculator
$
$
Include any dividends or interest earned in this total.
Years
Please enter valid positive numbers for all fields. Years must be greater than 0.
Compound Annual Growth Rate (CAGR)
0.00%
This is your geometric average annual return.
Total Gain / Loss
$0.00
Total Percentage Return
0.00%
Simple Average Annual Return
0.00%
(Total Return % รท Years) – Less accurate for compounding investments.
What is the Average Rate of Return?
The Average Rate of Return (ARR) measures the profitability of an investment over a specific period. For investors, understanding the rate at which their capital is growing is crucial for comparing different asset classes (like stocks, bonds, or real estate) and ensuring financial goals are met.
There are two primary ways to calculate the average rate of return, and the distinction is vital depending on whether you are looking at compounding growth or simple interest:
- CAGR (Compound Annual Growth Rate): The most accurate measure for investments that compound over time (like mutual funds or stocks). It assumes profits are reinvested.
- Simple Average Return: The arithmetic mean, calculated by dividing the total return by the number of years. This is simpler but often overestimates the actual growth of a portfolio over the long term.
Formulas Used in This Calculation
1. Compound Annual Growth Rate (CAGR)
This is the geometric mean and the preferred metric for investment performance.
CAGR = ( ( Ending Value / Beginning Value ) ^ ( 1 / n ) ) – 1
Where "n" is the number of years.
2. Simple Average Return
This is the arithmetic mean of the total return.
Simple Average = ( (Ending Value – Beginning Value) / Beginning Value ) / n
Example Calculation
Let's look at a realistic scenario to understand the difference between CAGR and Simple Average.
Imagine you invested $10,000 in a diversified portfolio.
- Initial Investment: $10,000
- Value after 5 Years: $16,500
- Total Gain: $6,500
| Metric | Calculation | Result |
|---|---|---|
| Total Return (%) | ($6,500 / $10,000) * 100 | 65.00% |
| CAGR | ((16,500 / 10,000) ^ (1/5)) – 1 | 10.53% |
| Simple Average | 65% / 5 Years | 13.00% |
Notice that the Simple Average (13.00%) is higher than the CAGR (10.53%). Relying on the simple average can lead to overestimating your investment's actual compounding performance.
Why Use CAGR?
CAGR smooths out the volatility of investment returns. In reality, markets go up and down. One year you might gain 20%, and the next you might lose 10%. CAGR answers the question: "What constant annual growth rate would have taken me from my starting balance to my ending balance?"
Factors Affecting Your Rate of Return
- Asset Allocation: Stocks generally offer higher returns but higher volatility than bonds.
- Fees and Expenses: Expense ratios and transaction fees directly reduce your net return.
- Inflation: To understand your "real" rate of return, you should subtract the inflation rate from your calculated nominal return.
- Time Horizon: Longer time horizons allow the power of compounding to work more effectively, smoothing out short-term market fluctuations.