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 — 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 — that overstates the rate due to ignoring compounding.
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% – 7% real (inflation-adjusted) for diversified portfolios; 7% – 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.