Annualised return

A return restated as the equivalent constant rate per year: total proceeds over total cost, raised to the power of one over the number of years, minus one.

Example

1.38^(1/7) - 1 = 4.71% a year, against 1.38^(1/1.5) - 1 = 23.95% for the same 38.0%.

Important

Annualising a very short period compounds it, which is why brief holds produce spectacular annual figures on small amounts of actual money.

Related terms

  • Return on investment (ROI) — Total proceeds less total cost, divided by total cost - the simplest measure of what an investment produced.
  • CAGR (compound annual growth rate) — The single steady annual growth rate that would take a starting value to an ending value over a given number of years.
  • Internal rate of return (IRR) — The single annual rate at which every cash flow, positive and negative, discounts back to exactly zero - the r solving sum of CF_t/(1+r)^t = 0.

Lessons that explain it

  • ROI, and the one thing it leaves out — Return on investment is the simplest measure there is, and it is silent about time. Two investments with the same ROI can be wildly different propositions. (9 min)
  • IRR: the measure that knows about time, and what it assumes — IRR is the rate at which every cash flow discounts back to zero. It is the right tool for irregular timings, and it systematically flatters anything held briefly. (14 min)
  • CAGR: the smoothed rate, and the path it deletes — Compound annual growth rate is the straight line drawn between two points. Two investments with identical CAGRs can be completely different experiences to live through. (11 min)

All 578 terms in the Investing glossary