Free calculator that shows your investment's true yearly performance - arithmetic average and CAGR - so you can compare returns accurately across stocks, funds, and portfolios.
Average return = Sum of periodic returns ÷ Number of periodsThe calculator applies the relevant rate-of-change, discounting or return relationship to the entered values and time period. Cash-flow timing, compounding, fees, taxes and inflation must be entered or evaluated separately unless the tool provides a field for them.
The simple term 'Average return' essentially works out what you've gained ( or lost) on a per annum basis over your selected investment period - rather than simply the end balance over the start value, giving an averaged annual figure.
Now Why Does It Count You might be sitting there wondering why average performance doesn’t match up total performance. In reality, it is much safer for an investor (like a financial student or just a shop owner with an average bank balance and a couple of businesses/projects/mutual funds or stock that he or she holds) to measure up an investment like stocks or a house on equal footing. For all this one does need an average rate of returns calculator .
An average return calculator converts your raw investment numbers into actionable insights.:
The average returns aren’t a single calculation formula - there are multiple ways to come up with the answer and it does carry specific significance in it.:
The arithmetic average versus geometric average (CAGR) will differ significantly for a given set of numbers. This gap increases when years offer a wide variety of returns from year to year.
Long-term periods normalize for day to day swings, whereas using a short series of data for a few periods might make a single great or disastrous year dramatically impact the overall average.
Arithmetic average returns on very volatile investments tend to be somewhat larger than the compounded rate of growth, which tends to overestimate performance in real dollars.
The effect is the same whether return is compounded annually, quarterly or monthly.
Money in or out of the plan during the measuring time can distort figures from showing true performance without adjustment for flow in.
Management fees, trading costs, and expense ratios eat away at net returns, that’s why the difference between the gross and the net average return for many Funds can vary dramatically.
A nominal average return can appear robust, but the actual purchasing power gained reflected in the real, inflation-adjusted return can say a very different story.
Pre-tax average returns hide effects of capital gain taxes and dividend taxes, because these reduces the return your client actually take-home.
So, your investment earns +50% year 1 and then -50% year 2. The arithmetic average calculation is 0% and sounds like you broke even - but your $1000 grew to $1500 then declined to $750, representing an actual 25% loss! CAGR accounts for this and a simple average return would mislead.
| Metric | Year 1 | Year 2 | Result |
|---|---|---|---|
| Arithmetic Average | +50% | -50% | 0% (misleading) |
| Actual (CAGR) | +50% | -50% | -13.4% per year (real result) |
Nothing we cover here is Financial advice. This information is solely intended for learning. Past returns not indicate results in the future, so it is always better to contact a licensed financial advisor for personalized financial advice.
Average return (arithmetic mean) is equal to the sum of the returns each year, divided by the number of years. CAGR (geometric mean) reflects compounding and shows the actual value of the investment in a truer reflection because annual gains can vary wildly over time.
Total up the annual rates of return over the entire time and divide by the total number of years. For example, over a three year span of a positive 10%, negative 5% and positive 15%, you can arrive at (10 - 5 + 15) / 3 = 6.7% annually.
A Good Long-term Average for Diversified Stock Portfolios. It’s usually understood that a high-single digit annual long-term average for an investment
CAGR will more realistically measure investment gains due to the compounded returns that it incorporates. Whereas, simple average can mask year-over-year volatility.
Total return is the overall percentage gain or loss throughout the full time period and average return translates that total to a per year amount. Without total return, however you have no indication as to if those returns were stable or not and were even across the board.
Yes, if an investment has losses that are on average greater (in magnitude or number of occasions) than gains then over that time period your return will average out to a negative one and represent an overall loss on your original funds.
Calculate the measure using the expected values, then change the time period, cost or ending value. A second scenario helps show whether the result is driven by performance, timing or the initial amount.