what is an annualized rate of return 
an annualized rate of return is calculated as the equivalent annual return an investor receives over a given period the global investment performance standards dictate that returns of portfolios or composites for periods of less than one year may not be annualized 1 this prevents projected performance in the remainder of the year from occurring understanding annualized rateannualized returns are scaled down to a 12 month period this scaling process allows investors to objectively compare the returns of any assets over any period 2keep in mind that transaction fees will affect the amount in your investment portfolio your investment portfolio might have a 5 annualized return for example but it could also have ongoing annual fees that reduce the portfolio value 3calculation using annual datacalculating the annualized performance of an investment or index using yearly data uses the following data points p principal or initial investmentg gains or lossesn number of yearsap annualized performance ratethe generalized formula which is exponential to take into account compound interest over time is ap p g p 1 n 12annualized rate of return examplesfor example assume an investor invested 50 000 into a mutual fund and four years later the investment is worth 75 000 this is a 25 000 gain in four years thus the annualized performance is ap 50 000 25 000 50 000 1 4 1in this example the annualized performance is 10 67 percent a 25 000 gain on a 50 000 investment over four years is a 50 percent return it is inaccurate to say the annualized return is 12 5 percent or 50 percent divided by four because this does not take into effect compound interest if reversing the 10 67 percent result to compound over four years the result is exactly what is expected 75 000 50 000 x 1 10 67 4it is important not to confuse annualized performance with annual performance the annualized performance is the rate at which an investment grows each year over the period to arrive at the final valuation in this example a 10 67 percent return each year for four years grows 50 000 to 75 000 but this says nothing about the actual annual returns over the four year period returns of 4 5 percent 13 1 percent 18 95 percent and 6 7 percent grow 50 000 into approximately 75 000 also returns of 15 percent 7 5 percent 28 percent and 10 2 percent provide the same result using days in the calculationindustry standards for most investments dictate the most precise form of annualized return calculation which uses days instead of years the formula is the same except for the exponent ap p g p 365 n 1assume from the previous example that the fund returned 25 000 over a 1 275 day period the annualized return is then ap 50 000 25 000 50 000 365 1275 1the annualized performance in this example is 12 31 percent 