What is an Annual Return

An annual return shows an investment’s percentage gain or loss within a year. It shows the amount of interest or profit earned based on the initial amount invested within the last 12 months. With these figures, investors can monitor the performance of individual stocks, funds, and their entire portfolio. 

Think of an annual return as a yearly health check-up for companies. It’s a snapshot that captures the financial pulse of a business, or an individual’s life. The annual return is an important metric that helps investors track their annual portfolio and growth. If you’re wondering how well your investments are performing each year, buckle up as we will explain what annual return is, how it is calculated, and an example to illustrate it. 

Key Points about Annual Return

Calculating Annual Return: There are a few steps you need to take to calculate the annual return. Take the ending value of the investment and subtract the beginning value. The value obtained is divided by the starting value which gives you the profit or loss amount. To get the average annual return as a percentage, take the total amount and divide it by the number of years the money was invested.

For example, assuming you’ve invested $10,000 in a mutual fund at the start of 2021. One year later, at the end of 2022, the value of the money you invested initially has grown to $11,000. To calculate the annual return, you’ll take the ending value ($11,000) and subtract the starting value ($10,000) which will be $1,000. To get the average annual return as a percentage, divide the profit ($1,000) by the starting value ($10,000) and this gives you 0.10 or 10%. In other words, the annual return for the one year covered is 10%. 

If you’re a passive long-term investor, then, think of annual returns as a report card that helps you choose the best investments. It illuminates slower but steady growth that’s compounded over the years, which is more accurate compared to short-term price fluctuations. It is a simple, yet, effective strategy for patient investors eager to beat the market and achieve financial freedom.