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Monday, April 24, 2017

Annualized Return

What is Annualized Return?


Annualized Return is the geometric mean return of an investment provides over a period of time and expressed in a time-weighted annual percentage. It shows what an investor would earn over a period of time if the annual return was compounded. The Annualized Return is measured against the initial amount of the investment and represents a geometric mean rather than a simple arithmetic mean. 

Why used Annualized Return?

Annualized Return, also known as Compound Annual Growth Rate (CAGR), is more accurate than a simple return, as it includes the compounding interest, while simple return just simply add up all the returns without the time-weighted factor. Hence, this makes it one of the best measures when various type of investments are being compared.  


How to Calculate Annualized Return?


Example?

Client A invested RM100,000 on Unit Trust Fund A with #YourFinanceDoctor on Jan 1, 2007. Assume that Client A would like to sell on Jan 1, 2017 for RM200,000. Client A also receives a total of RM50,000 in dividends over the ten-year holding period. So ending value of investment will be RM250,000 while beginning value of investment will be RM100,000 over 10 years.

Annualized Return = ((250,000/100,000)^(1/10)) - 1 =  9.60%

Simple Return = ((150,000/100,000) x 100%) / 10 = 15%


A Simple Return of 15% a year would seems like a very good investment but in fact the Annualized Return is only 9.60%! (Which is still a good return tho!) Simple Return is commonly used in promotional materials for investments, so beware not to be mislead-ed and always ask for the Annualized Return!


22 comments:

  1. Another informative post, Henry! Have a great week ahead!

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    1. Thanks Shirley for reading! If you find it helpful, share with your friends too ya!

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  2. menarik perkongsian pulangan tahunan ni...

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  3. Oh my. Thanks for this post, I know what I can expect from my investment. Thanks so much!

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  4. I'm so noob when it comes about money and financial management. Thank you for the info.

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  5. This annual return that I know is ASB's investment hehehehe but i do not know there's another way it's good. Good info.

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  6. You are indeed a true finance doctor. Every post u posted, i learn so many new things about investment and stuff. Great info and thanks for sharing it with us.

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  7. Thank for the info. For those who need knowledge about investment in their financal should read your blog. Accurate info.

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  8. Satu maklumat yang amat berguna.. Thanks sharing

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  9. So next time if we want to know our ROI we should calculate the AR instead of SR. I believe a lot of people always "tertipu" when they see the highest rate in SR.

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  10. Thank you for the info. Honestly I have zero knowledge to talk about investment, money or financial management.

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  11. Terima kasih atas perkongsian...selalu kalau bab kira2 ni memang serahkan pada mereka yang layak sahaja, mcm my agen...lagipun mana tmpt yg kita invest akan buatkan kira2 utk kita. Nak kira sendiri mmg tak tahu...hehehe

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  12. Thanks for sharing, really love reading your blog, I always learn something out of it.

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  13. thanks was a good sharing to spread..

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  14. Noob nya i...thanks for thia sharing..
    Will take this measurement for next investment

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  15. Thanks for sharing, need to be very careful where to put or invest your money in.

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  16. Thanks for the info. Banyak nak kena belajar pasal investment ni.

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  17. Simple yet informative info regarding annualised return. Thankd for sharing

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