Chartered Financial Analyst, specializing in Portfolio Performance.
Use the **Annualized Return Calculator** to determine the average annual rate of return on an investment over a multi-year period, a key metric for comparing different investment strategies.
Annualized Return Calculator
Annualized Return (CAGR)
—Annualized Return Formula
Formula Source: Investopedia | Related Source: SEC Guidance
Variables Explained
- Initial Investment / Start Value: The principal amount invested at the beginning of the period. This should be a positive dollar amount.
- Final Value / Ending Balance: The total value of the investment, including all gains, dividends, and interest, at the end of the period.
- Time Period (Years): The total number of years the investment was held. This must be a positive number.
What is Annualized Return?
Annualized Return, often referred to as Compound Annual Growth Rate (CAGR), is a standardized metric used to calculate the geometric mean rate of return over a specified period longer than one year. It smooths out fluctuations in returns, providing a hypothetical, constant annual growth rate that would have compounded to the final value from the initial investment.
Financial professionals use this metric primarily to compare the performance of different investments (like stocks, bonds, or mutual funds) that have been held for varying lengths of time. By annualizing the return, investors can see which investment has the superior growth rate on a yearly basis, making performance comparisons fair and simple.
How to Calculate Annualized Return (Example)
Let’s calculate the Annualized Return for an investment with a Start Value of $50,000, a Final Value of $75,000, over 7 years.
- Calculate the Total Growth Ratio: Divide the Final Value ($75,000) by the Initial Investment ($50,000). ($75,000 / $50,000 = 1.5)
- Determine the Exponent: Calculate the inverse of the time period. (1 / 7 years ≈ 0.142857)
- Raise the Ratio to the Power: Raise the total growth ratio (1.5) to the exponent (0.142857). ($1.5^{0.142857} \approx 1.0596$)
- Subtract One: Subtract 1 from the result to isolate the rate of return. ($1.0596 – 1 = 0.0596$)
- Convert to Percentage: Multiply by 100 to get the annualized percentage. ($0.0596 \times 100 = 5.96\%$)
Frequently Asked Questions (FAQ)
CAGR is a geometric mean, which accounts for compounding effects, providing a more accurate representation of the investment’s true year-over-year growth. Simple average return does not account for compounding, which can mislead investors, especially over volatile or long periods.
Can the Annualized Return be negative?Yes, if the Final Value of the investment is less than the Initial Investment (i.e., the investment lost money over the period), the Annualized Return will be a negative percentage.
What if the time period is less than one year?While the formula still works, for periods less than a year, it is generally recommended to use Simple Return or Effective Annual Rate (EAR) for clearer interpretation.
Does Annualized Return include fees?The Annualized Return calculated here is based on the dollar amounts input. If the Final Value is the balance *after* all fees and taxes, then the resulting return is net of those expenses. It’s crucial to input the true net final value.