According to the Vanguard website, the Vanguard S&P 500 Index Fund is down 12.07% YTD as of yesterday’s close. To get an idea of what that return would look like if it were to continue for an entire year, you can annualize the YTD return.

It’s a fairly simple calculation to perform as long as you have the following information:

1. Number of days that have elapsed so far this year. This is easy to calculate if you have access to Excel.

2. The YTD return of the investment that you want to annualize.

The formula for annualizing a ROR is pretty straight forward:

^{1/(#of days/365)}] – 1

The YTD ROR should be expressed as a decimal. Plugging in the Vanguard S&P 500 Index Fund information from above, the equation looks like this:

^{1/(204/365)}] – 1

^{1/(0.55890411)}] – 1

^{1.7892}] – 1

So, a 12.07% loss for the first 204 days of the year equates to a 20.56% loss on an annualized basis.

Now let’s say you are down 12.07% but you purchased this fund on December 31, 2006. How do you annualize that return? The only input that changes in the above formula is the number of days, which is now 570.

^{1/(570/365)}] – 1

^{1/1.5616}] – 1

^{0.640350877}] – 1

Had you purchased an investment on December 31, 2006 that is currently down 12.07% since the time of purchase, your annualized rate of return on that investment would be -7.91%. Not much of a return is it? Anyway, now you know how to annualize your returns. Fun stuff!