Annualised return

Annualised return is the geometric average return per year over a multi-year period, expressed as if the investment had earned the same rate every year. It allows fair comparison of returns across different time periods and is the standard way to report multi-year investment performance.

Why a simple average is misleading

If an investment returns 50% in year one and −50% in year two, the simple average return is 0%. But $100 grows to $150 in year one, then falls to $75 in year two — a real loss of 25%. Annualised return captures this compounding effect; simple averages do not.

Formula

Annualised Return = ((Ending Value ÷ Starting Value) ^ (1 ÷ Years)) − 1

Example

An investment grows from $10,000 to $16,500 over five years:

Annualised Return = ((16,500 ÷ 10,000) ^ (1 ÷ 5)) − 1 = 0.1054, or 10.54% per year.

This is the constant annual rate that, if achieved every year for five years, would produce the same final balance.

Why annualised return matters

• Apples-to-apples comparison — converts returns from any time period to a common annual basis
• Reflects compounding — accounts for the compound interest effect of returns on returns
• Smooths volatility — a single annualised number hides year-to-year swings, but the underlying volatility remains relevant for risk assessment
• Standard reporting metric — most published fund and asset returns are annualised by default

Cautions

• Past returns do not predict future returns — annualised history is a description, not a forecast
• Period selection matters — choosing favourable start and end dates can flatter results dramatically
• Volatility is hidden — two investments with the same annualised return can have very different drawdowns and risk profiles
• Net of fees — always check whether the annualised return is gross or net of management fees, which compound against performance over time

When comparing investment options or planning future net worth, use annualised real (after-inflation) returns to project realistic outcomes.