Annualized Return

Investments are held for different lengths of time, so their total returns are hard to compare directly. Annualizing converts each return into an equivalent yearly rate.

For example, an investment that grows from 10,000 to 13,310 over three years has a total return of 33.1%. Its annualized return is 10%, because 10,000 growing at 10% a year for three years reaches 13,310. Simply dividing 33.1% by three would give 11%, which overstates the yearly rate because it ignores compounding.

Annualized return is the same idea as the compound annual growth rate. It is the standard way funds report performance over three, five or ten years.

Annualizing returns over periods shorter than a year can be misleading. A 5% gain in one month, annualized, would suggest a return of nearly 80% a year, which is unlikely to continue.

Annualized returns smooth out the path an investment took. Two investments with the same annualized return may have had very different ups and downs along the way, so volatility and drawdowns are also worth considering.