Comments on: How to Annualize a Rate of Return http://allfinancialmatters.com/2008/07/23/how-to-annualize-a-rate-of-return/ A personal finance blog dedicated to discussing such topics as budgeting, asset allocation, 401K, IRA, cash flow, insurance, financial planning, portfolio management, and other areas in personal finance. Fri, 25 May 2012 12:41:29 +0000 hourly 1 http://wordpress.org/?v= By: JLP http://allfinancialmatters.com/2008/07/23/how-to-annualize-a-rate-of-return/comment-page-1/#comment-458554 JLP Wed, 13 Jul 2011 16:15:54 +0000 http://allfinancialmatters.com/?p=2702#comment-458554 Leon, You're right. I corrected the numbers. Not sure how that happened. Thanks for the catch. Leon,

You’re right. I corrected the numbers. Not sure how that happened. Thanks for the catch.

]]> By: Leon Goekjian http://allfinancialmatters.com/2008/07/23/how-to-annualize-a-rate-of-return/comment-page-1/#comment-458536 Leon Goekjian Tue, 12 Jul 2011 01:54:34 +0000 http://allfinancialmatters.com/?p=2702#comment-458536 I have tried to solve the above equation if you divide 1/0.55890411 I got 1.789215685 and not 1.7805 like you got in your example. I used Excel. Please advise. Why? I have tried to solve the above equation if you divide 1/0.55890411 I got 1.789215685 and not 1.7805 like you got in your example. I used Excel. Please advise. Why?

]]> By: david http://allfinancialmatters.com/2008/07/23/how-to-annualize-a-rate-of-return/comment-page-1/#comment-445448 david Sat, 11 Sep 2010 21:12:14 +0000 http://allfinancialmatters.com/?p=2702#comment-445448 Thanks for the formula. I think the second step would be clearer written as (1 + -0.1207) Thanks for the formula. I think the second step would be clearer written as (1 + -0.1207)

]]> By: Taylor http://allfinancialmatters.com/2008/07/23/how-to-annualize-a-rate-of-return/comment-page-1/#comment-441815 Taylor Tue, 26 Jan 2010 23:54:21 +0000 http://allfinancialmatters.com/?p=2702#comment-441815 You should care about annualized rate of returns because that's how financial numbers are typically reported. It's especially important in merger arbitrage opportunities where you may only be holding a stock for as little as a month just to pick up a percent or two. That 1-2% gain doesn't look like much, but on a risk/reward basis it's actually very desirable. Annualizing that 1-2% allows you to compare your performance to major financial indexes historical returns (which are all based on annual returns). It's not a complex formula, and it will give you a better idea of how an investing strategy should perform over longer periods of time. You should care about annualized rate of returns because that’s how financial numbers are typically reported. It’s especially important in merger arbitrage opportunities where you may only be holding a stock for as little as a month just to pick up a percent or two. That 1-2% gain doesn’t look like much, but on a risk/reward basis it’s actually very desirable. Annualizing that 1-2% allows you to compare your performance to major financial indexes historical returns (which are all based on annual returns). It’s not a complex formula, and it will give you a better idea of how an investing strategy should perform over longer periods of time.

]]> By: Nia http://allfinancialmatters.com/2008/07/23/how-to-annualize-a-rate-of-return/comment-page-1/#comment-339037 Nia Sun, 27 Jul 2008 03:01:38 +0000 http://allfinancialmatters.com/?p=2702#comment-339037 hey JLP, Do you know anything about sheltering income from tax using federal incentives for investment in natural resources? http://blog.greenwichfinancial.com/2008/05/copyright-2008-greenwich-financial.html hey JLP, Do you know anything about sheltering income from tax using federal incentives for investment in natural resources? http://blog.greenwichfinancial.com/2008/05/copyright-2008-greenwich-financial.html

]]> By: JLP http://allfinancialmatters.com/2008/07/23/how-to-annualize-a-rate-of-return/comment-page-1/#comment-337200 JLP Wed, 23 Jul 2008 19:02:28 +0000 http://allfinancialmatters.com/?p=2702#comment-337200 ebow, An annualized ROR is good for comparing your performance (or your advisor's or mutual fund's performance) with a benchmark. ebow,

An annualized ROR is good for comparing your performance (or your advisor’s or mutual fund’s performance) with a benchmark.

]]> By: ebow http://allfinancialmatters.com/2008/07/23/how-to-annualize-a-rate-of-return/comment-page-1/#comment-337193 ebow Wed, 23 Jul 2008 18:42:20 +0000 http://allfinancialmatters.com/?p=2702#comment-337193 I can follow the formula well enough but don't really see the point. If I've held a security for more than a year, and it's down 12.07% since I bought it, why do I care what the equivalent rate of return over a year would be? I'm still down 12.07%. Another blogger wrote about some kind of stock buy-back he got in on, and expressed his gains in terms of an annualized rate. The transaction's over and he can't make any more money on it, so what is the annualized rate good for? I can follow the formula well enough but don’t really see the point. If I’ve held a security for more than a year, and it’s down 12.07% since I bought it, why do I care what the equivalent rate of return over a year would be? I’m still down 12.07%. Another blogger wrote about some kind of stock buy-back he got in on, and expressed his gains in terms of an annualized rate. The transaction’s over and he can’t make any more money on it, so what is the annualized rate good for?

]]> By: JLP http://allfinancialmatters.com/2008/07/23/how-to-annualize-a-rate-of-return/comment-page-1/#comment-337189 JLP Wed, 23 Jul 2008 18:37:06 +0000 http://allfinancialmatters.com/?p=2702#comment-337189 Wilson, Actually, most financial advisors would be wanting to keep their clients from knowing how to annualize negative returns since it makes the numbers look worse. Wilson,

Actually, most financial advisors would be wanting to keep their clients from knowing how to annualize negative returns since it makes the numbers look worse.

]]> By: Wilson http://allfinancialmatters.com/2008/07/23/how-to-annualize-a-rate-of-return/comment-page-1/#comment-337186 Wilson Wed, 23 Jul 2008 18:20:12 +0000 http://allfinancialmatters.com/?p=2702#comment-337186 First am I:) This makes me scratch my head, despite tons of mathematical formulas in that skull. The rule is just too complicated for joe6packs. My rules are much better: A) do I make money at the end of the day? B) Is my positive return, if any, greater than that of a CD account? That's all I want to know. Just make money, simple. The formulas illustrated hereinabove, I guess, are used by financial advisers to justify the negative or poor return, just like mortgage/financial companies use off-balance-sheets, level-3 assets, etc, to present their nice performance to share holders:) First am I:)
This makes me scratch my head, despite tons of mathematical formulas in that skull. The rule is just too complicated for joe6packs. My rules are much better: A) do I make money at the end of the day? B) Is my positive return, if any, greater than that of a CD account? That’s all I want to know.
Just make money, simple.
The formulas illustrated hereinabove, I guess, are used by financial advisers to justify the negative or poor return, just like mortgage/financial companies use off-balance-sheets, level-3 assets, etc, to present their nice performance to share holders:)

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