Annualized Rate of Return

What is Annualized Rate of Return?

Annualized rate of return is the average annual return over a period of years, considering the effect of compounding (also called compound growth rate).

Annualized Rate of Return Formula

The Annualized Rate of Return is calculated on a time-weighted basis – this allows investors to compare asset returns over any period. Typically, the annualized rate of return is a 12-month period. Taking this into account, if one month’s rate of return is 0.21% and the next month’s is 0.29%, the change in the rate of return from one month to the next is 0.08% (0.29-0.21). To get the annualized rate of the return, multiply 0.08% by 12 (0.08% x 12) to get a 0.96% rate of return. 

What is a Good Annualized Rate of Return?

A “good” annualized rate of return depends on what you’re measuring. Although the stock market generally has an annual return of 6%, there will be years when that percentage rate will be higher or lower. Since most finances are reflective of stock market returns, a percentage rate higher than 6-8% would be considered a good rate of return. Additionally, it is important to know your investment goals to know how much money and time you must invest to cross the finish line.

Wealthspire Advisors is a registered investment adviser and subsidiary company of NFP Corp.

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