The Annualized Rate of Return Calculator helps you determine the compound annual growth rate (CAGR) of your investments. This will standardize your returns toa per year figure, which shows you your truelong term average portfolio performance.
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The annualized rate of return, also called the compound annual growth rate (CAGR), is how much your investments would have to grow each year to have the beginning value reach the ending value over the specified holding period.
So if you grow $1000 into $2000 over the span of 5 years, you will have made a 100% return, but your annualized return isnot simply:
100 / 5 = 20%
Why not?
Because due to compounding, 5 years of 20% returns would result in an ending value of:
1000 x 1.205 = 2488.32
This result is way too high.
To calculate the correctannualized rate of return, we have to use this formula:
CAGR = (ending value / beginning value)(1 / years held) - 1
Using our example:
(2000 / 1000)(1 / 5) - 1 = 14.87%
So the annualized rate of return is in fact 14.87%.
Or in other words, if you're able to grow your investments by 14.87% per year, you will double your money in 5 years time.
