Annualized Return

What is it? The yearly increase (or decrease) in the value of an investment, including the effects of compounding. Annualized returns are a bit more complicated than average returns, which you can get by adding up the annual returns of a stock or fund and dividing by the number of years. To calculate annualized return you need a good calculator. For a three-year annualized return, for example, you must take the cube root of the cumulative return for a three-year period to factor in compounding. Annualized return gives you a much better idea of how a stock or fund performed and makes it easier to compare them over the long term. Securities that have the same average return may have wildly different annualized returns, especially if one security is volatile. For example, its possible for a stock or fund to have a respectable average return but a negative annualized returned if gains in the first two years are offset by a big drop in the third.

Added By: Elizabeth

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