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.