1. What is Average Annual Return?

The Average Annual Return is a percentage that tells you how much an investment has grown or shrunk each year on average over a specific period. It's a useful metric for comparing the performance of different investments over time.

2. How Does the Calculator Work?

The calculator uses the simple average annual return formula:

Where:

• \( \text{Total Return} \) — The overall return expressed as a decimal (e.g., 0.50 for 50%)
• \( \text{Years} \) — The investment period in years

Explanation: This calculation spreads the total return evenly across each year of the investment period to give an annualized figure.

3. Importance of Average Annual Return

Details: Average annual return helps investors compare different investments regardless of their time periods. It's particularly useful for evaluating mutual funds, stocks, and other long-term investments.

4. Using the Calculator

Tips: Enter the total return as a decimal (e.g., 1.00 for 100% return) and the investment period in years. Both values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: How is this different from CAGR?
A: Average annual return is a simple average, while CAGR (Compound Annual Growth Rate) accounts for compounding effects. CAGR is generally more accurate for investments.

Q2: What's considered a good average annual return?
A: Historically, the S&P 500 averages about 7-10% annually after inflation. Returns above this are considered excellent, though they often come with higher risk.

Q3: Does this account for inflation?
A: No, this calculates nominal returns. For real returns, you would need to adjust for inflation separately.

Q4: Can I use this for negative returns?
A: Yes, simply enter the negative return as a negative decimal (e.g., -0.20 for a 20% loss).

Q5: Why would I use simple average instead of CAGR?
A: Simple average is easier to calculate and understand, though it may overstate returns for volatile investments.