Annualized return

The annualized return, also known as CAGR (Compound Annual Growth Rate), is a tool used to make the performance of financial investments comparable. It calculates the total return on an investment as if it had been achieved over a period of exactly one year. This is particularly important when comparing two investments that have been held for different lengths of time, such as a stock held for three years and a fund held for seven years.

Unlike the simple return, the annualized version takes the compound interest effect into account. It shows the hypothetical, steady growth that would have been necessary to reach the final value from the starting value. The formula uses the nth root of the total return, where n represents the number of years.

This smooths out short-term fluctuations and provides investors with a realistic measure of the annual effective return on their capital.

True Wealth reports both the annualized time-weighted return and the annualized money-weighted return in client portfolios.

In our blog post «Calculating Portfolio Returns», we discuss the key characteristics of these two calculation methods.