By MoneyBees
Return scaled to a 12-month rate, allowing fair comparison of investments with different holding periods.
Annualised return is a return scaled to a 12-month rate, regardless of the actual measurement period. It allows fair comparison of investments with different holding periods, such as a 3-month return vs a 5-year return, expressed as equivalent yearly rates.
Most investment statements report annualised returns for periods over 1 year. Sub-annual periods are typically shown as cumulative returns without annualisation.
Annualised return = (1 + cumulative return)^(1/years) − 1
Example: an investment returns 25% over 2 years cumulatively. Annualised return = 1.25^0.5 − 1 = 11.8%.
Don't simply divide cumulative return by years. That overstates the rate for any period above 1 year due to compounding.
For lump-sum investments held without contributions or withdrawals, annualised return and CAGR are mathematically identical.
CAGR is the more common term in investing literature; annualised return is used interchangeably in fund factsheets.
For investments with cashflows (regular contributions or withdrawals), use XIRR instead. Both annualised return and CAGR understate the true rate when contribution timing varies.
Volatility is annualised similarly: monthly standard deviation × √12, or daily standard deviation × √252 (trading days per year).
Reporting annualised returns alongside annualised volatility gives a complete picture: return and risk at the same time horizon.
Beware: short measurement windows can mislead. A 3-month period annualised to a 'great year' is not representative of long-run performance.
A return scaled to a 12-month rate, regardless of the actual measurement period. Lets you compare investments held for different lengths (e.g. a 3-year fund vs a 5-year fund) on equal terms. Different from simple-averaging returns. Annualised accounts for compounding.
(1 + cumulative return)^(1/years) − 1. A 25% cumulative return over 2 years annualises to (1.25)^0.5 − 1 = 11.8%. Don't simply divide cumulative by years, because that ignores compounding and overstates the rate.
For a lump sum held without contributions / withdrawals: yes, mathematically identical. CAGR is the more common name in investing literature. For investments with periodic cashflows, neither is right. Use XIRR instead.
Plan with 5% to 7% real (inflation-adjusted) for diversified portfolios; 7% to 10% nominal. CPF SA gives 4% real for the low-risk portion. Use these as conservative anchors. Actual returns vary year-to-year; what matters is the long-run average across a 20+ year horizon.
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