How to Calculate Annualized Return

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Annualized Return (CAGR) Calculator

Calculation Results:

Annualized Return (CAGR):

Total Percentage Return:

function calculateCAGR() { var start = parseFloat(document.getElementById('startValue').value); var end = parseFloat(document.getElementById('endValue').value); var years = parseFloat(document.getElementById('durationYears').value); var resultDiv = document.getElementById('cagrResult'); if (isNaN(start) || isNaN(end) || isNaN(years) || start <= 0 || years <= 0) { alert("Please enter valid positive numbers for Initial Value, Ending Value, and Years."); resultDiv.style.display = 'none'; return; } // Formula: CAGR = [(Ending Value / Beginning Value) ^ (1 / Number of Years)] – 1 var cagr = (Math.pow((end / start), (1 / years)) – 1) * 100; var totalReturn = ((end – start) / start) * 100; document.getElementById('cagrOutput').innerText = cagr.toFixed(2) + "%"; document.getElementById('totalReturnOutput').innerText = totalReturn.toFixed(2) + "%"; resultDiv.style.display = 'block'; }

Understanding Annualized Return: A Comprehensive Guide

When evaluating the performance of an investment over time, looking at the total return can be misleading, especially if the investment was held for many years. To truly compare different assets, investors use the Annualized Return, often referred to as the Compound Annual Growth Rate (CAGR).

What is Annualized Return?

Annualized return provides the geometric mean of the money earned by an investment each year over a given period. Unlike a simple average, it accounts for the effects of compounding, showing what the investment would have earned annually if it had grown at a steady rate every single year.

The Annualized Return Formula

CAGR = [(Ending Value / Beginning Value) ^ (1 / n)] – 1

Where:

  • Ending Value: The current market value of the investment.
  • Beginning Value: The initial amount invested.
  • n: The number of years the investment was held.

Example Calculation

Suppose you invested $5,000 in a stock portfolio. After 4 years, your portfolio is worth $7,500. How do you calculate the annualized return?

  1. Divide Ending Value by Beginning Value: 7,500 / 5,000 = 1.5
  2. Raise that to the power of 1/n: 1.5 ^ (1 / 4) ≈ 1.1067
  3. Subtract 1: 1.1067 – 1 = 0.1067
  4. Multiply by 100 for percentage: 10.67%

This means your investment grew by approximately 10.67% every year for four years.

Total Return vs. Annualized Return

In the example above, your total return was 50% ($2,500 gain on a $5,000 investment). However, if you compare a 50% gain over 4 years to a 50% gain over 10 years, the 4-year investment is clearly superior. Annualizing the return allows you to normalize the timeframe so you can compare the efficiency of different investments side-by-side.

Why is it Important?

  • Benchmarking: It allows you to compare your portfolio's performance against indices like the S&P 500.
  • Goal Setting: It helps you determine if your current growth rate is sufficient to meet future financial goals (like retirement).
  • Risk Assessment: High annualized returns often come with higher volatility; understanding the true annual rate helps in evaluating risk-adjusted returns.

Expert Tip

Remember that annualized return assumes all dividends or interest payments were reinvested. If you took the cash out, the calculation would need to be adjusted to reflect those withdrawals.

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