Reviewed by Gotrade Internal Analyst
Annualized return measures the average yearly return of an investment over a specific period. Instead of looking at total growth alone, annualized return shows how much an investment would have grown per year, on average.
This metric allows investors to compare investments held for different timeframes. A 30% total gain over three years may sound strong, but annualized return reveals how consistent that growth was each year.
Understanding annualized return helps investors interpret performance more accurately.
What Is Annualized Return
Annualized return represents the geometric average rate of return per year over a given period. It answers the question: if this investment grew at a steady rate each year, what would that yearly rate be?
Unlike simple averages, annualized return accounts for compounding. This makes it more accurate when evaluating multi-year investments.
For example:
-
An investment grows from $10,000 to $13,000 over three years.
-
The total return is 30%.
-
The annualized return shows the equivalent yearly growth rate that leads to that total increase.
Annualized return standardizes performance into yearly terms, making comparisons easier.
How Annualized Return Is Calculated
The calculation uses a compounding formula.
Basic formula
Annualized return = (Ending value ÷ Beginning value)^(1 ÷ Number of years) − 1
For example:
-
Beginning value: $10,000
-
Ending value: $13,000
-
Time period: 3 years
Step 1: Divide ending value by beginning value.
$13,000 ÷ $10,000 = 1.3
Step 2: Raise the result to the power of 1 divided by 3.
1.3^(1/3) ≈ 1.091
Step 3: Subtract 1.
1.091 − 1 = 0.091 or 9.1%
The annualized return is approximately 9.1% per year.
This reflects compounded growth rather than a simple average of yearly returns.
Most investment platforms calculate annualized return automatically, but understanding the formula clarifies how compounding affects performance.
If you evaluate long-term portfolio performance, you can invest using Gotrade App and review annualized returns across global assets to compare strategies consistently.
Annualized Return vs Total Return
Annualized return and total return measure performance differently.
Total return reflects overall percentage gain or loss over a period.
Annualized return converts that total return into an average yearly rate accounting for compounding.
Key differences:
| Aspect | Total Return | Annualized Return |
|---|---|---|
| Definition | Overall percentage gain or loss | Average yearly compounded return |
| Time Adjustment | No | Yes |
| Comparison Across Timeframes | Difficult | Easier |
| Example | 30% over 3 years | 9.1% per year over 3 years |
Total return answers how much money was made.
Annualized return answers how efficiently it grew per year.
For long-term investors, annualized return provides a clearer measure of performance consistency.
Why Annualized Return Matters
Annualized return allows fair comparison between investments with different holding periods.
For example:
-
Investment A gains 20% in one year.
-
Investment B gains 30% over three years.
Without annualizing, Investment B may appear stronger. However, annualized return reveals the yearly growth rate for accurate comparison.
Annualized return also supports long-term planning.
When estimating retirement growth or future portfolio value, consistent yearly growth assumptions are necessary. Annualized return provides that standardized measure.
It also helps evaluate whether performance aligns with long-term financial goals.
Practical Annualized Return Example
Assume you invest $15,000 in a diversified stock portfolio.
After five years, the portfolio grows to $22,500.
Step 1: Calculate total return.
$22,500 ÷ $15,000 = 1.5
Total return = 50%
Step 2: Apply the annualized return formula.
1.5^(1/5) ≈ 1.084
Subtract 1:
1.084 − 1 = 0.084 or 8.4%
The annualized return is approximately 8.4% per year.
This means the investment effectively grew at an average compounded rate of 8.4% annually over five years.
If you consistently contribute to investments with similar growth rates, long-term compounding can significantly increase total capital.
Conclusion
Annualized return measures the average yearly compounded return of an investment over time. It provides a standardized way to compare performance across different timeframes.
While total return shows overall growth, annualized return reveals consistency and efficiency.
Understanding annualized return improves long-term planning, portfolio comparison, and performance evaluation.
FAQ
What is annualized return in simple terms?
Annualized return is the average yearly rate at which an investment grows, accounting for compounding.
Is annualized return the same as average return?
No. Annualized return accounts for compounding, while simple average return does not.
Why is annualized return important for long-term investors?
It allows consistent comparison across investments and helps estimate future portfolio growth.
References
-
Investopedia, Annualized Total Return Formula, 2026.
-
Corporate Finance Institute, Overview, Formula, Annualized Return, 2026.
