1. What is Annual Return on Investment?

Annual Return on Investment (Annual ROI) is a measure of the yearly growth rate of an investment. It converts the total return over multiple years into an equivalent annual rate, allowing for comparison between investments of different durations.

2. How Does the Calculator Work?

The calculator uses the Annual Return formula:

Where:

• \( \text{Total Return} \) — The total return over the investment period (as decimal, e.g., 0.5 for 50%)
• \( \text{years} \) — The number of years the investment was held

Explanation: The formula calculates the compound annual growth rate (CAGR) that would grow an investment from its initial value to its ending value over the specified period.

3. Importance of Annual Return Calculation

Details: Annualizing returns allows investors to compare investments of different durations on an equal basis. It's essential for performance evaluation, portfolio management, and investment decision-making.

4. Using the Calculator

Tips: Enter total return as a decimal (e.g., 0.5 for 50% return) and the number of years the investment was held. Both values must be valid (years > 0).

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between annual return and total return?
A: Total return shows the overall growth over the entire period, while annual return shows the equivalent yearly growth rate that would produce that total return.

Q2: Can annual return be negative?
A: Yes, if the investment lost value over the period, the annual return will be negative.

Q3: How does this differ from average annual return?
A: This calculates compound annual growth rate (CAGR), which accounts for compounding, while simple average return doesn't consider compounding effects.

Q4: What are good annual return benchmarks?
A: Historically, S&P 500 returns about 7-10% annually. Returns above 15% are considered excellent, while below 5% may not keep pace with inflation.

Q5: Does this work for investments with irregular cash flows?
A: No, this simple formula assumes a single initial investment with no additional contributions or withdrawals. For irregular cash flows, use Internal Rate of Return (IRR) instead.