Calculating your rate of return per year is essential for investors who want to accurately compare the performance of different assets held over varying time periods. While a simple "total return" tells you how much money you made, the "annualized rate of return" (often referred to as the Compound Annual Growth Rate or CAGR) tells you how hard your money worked for you on a yearly basis.
This calculator helps you determine the annualized growth rate of an investment, mutual fund, stock, or business venture based on its starting value, ending value, and the time duration.
Why Annualized Return Matters
Imagine Investment A returns 20% over 2 years, and Investment B returns 20% over 5 years. While the total return is the same, Investment A is significantly better because it achieved that result faster. Calculating the rate of return per year allows you to compare these two investments "apples to apples."
The Formula for Rate of Return Per Year (CAGR)
To calculate the rate of return per year, we use the CAGR formula which accounts for the effect of compounding. The formula is:
Rate of Return Per Year = ((Ending Value / Beginning Value) ^ (1 / n)) – 1
Where:
Ending Value: The value of the investment at the end of the period.
Beginning Value: The initial amount invested.
n: The number of years the investment was held.
Example Calculation
Let's say you purchased stock for $10,000. After 5 years, the portfolio is worth $16,105.
Divide Ending Value by Beginning Value: 16,105 / 10,000 = 1.6105.
Take the 5th root (raised to power of 1/5 or 0.2): 1.6105 ^ 0.2 = 1.10.
Subtract 1: 1.10 – 1 = 0.10.
Multiply by 100 to get percentage: 10% per year.
Simple Return vs. Annualized Return
It is important not to confuse Simple Annual Return (Arithmetic Mean) with Compound Annual Growth Rate (Geometric Mean). Simple return just divides the total profit by years, ignoring the compounding effect, which can lead to overestimating performance. This calculator uses the geometric mean (CAGR), which is the industry standard for accurate multi-year performance analysis.
Using This Calculator
Simply enter your starting investment amount, the current or final value of that investment, and the number of years you have held (or plan to hold) the asset. The calculator will provide the Total Gain/Loss in dollars, the Total Return Percentage, and most importantly, the Annualized Rate of Return.
function calculateRateOfReturn() {
// Get input values using var
var startVal = parseFloat(document.getElementById("initialInvestment").value);
var endVal = parseFloat(document.getElementById("finalValue").value);
var years = parseFloat(document.getElementById("yearsHeld").value);
// Validation logic
if (isNaN(startVal) || isNaN(endVal) || isNaN(years)) {
alert("Please enter valid numbers for all fields.");
return;
}
if (startVal <= 0) {
alert("Initial Investment must be greater than zero.");
return;
}
if (years = 0 ? "+$" + totalProfit.toFixed(2) : "-$" + Math.abs(totalProfit).toFixed(2);
document.getElementById("totalProfit").innerText = profitText;
document.getElementById("totalProfit").style.color = totalProfit >= 0 ? "#2e7d32" : "#c62828";
// Format Total Return Percent
var totalReturnText = totalReturnPercent.toFixed(2) + "%";
document.getElementById("totalReturnPercent").innerText = totalReturnText;
document.getElementById("totalReturnPercent").style.color = totalReturnPercent >= 0 ? "#2e7d32" : "#c62828";
// Format Annualized Return Percent
var cagrText = annualizedReturn.toFixed(2) + "%";
document.getElementById("annualizedReturn").innerText = cagrText;
document.getElementById("annualizedReturn").style.color = annualizedReturn >= 0 ? "#2e7d32" : "#c62828";
}