**Understanding Annualized Total Return** Investors are always looking for ways to make smart decisions with their money. One important tool for evaluating investments is the annualized total return. This figure represents the average return (or loss) of an investment over a 12-month period and is typically expressed as a percentage. Annualized total return can be calculated for various types of investments, such as stocks, bonds, mutual funds, and real estate. By comparing the annualized total returns of different investments, investors can make informed decisions about where to put their money. **What Does Annualized Total Return Mean?** Annualized total return is a measure of the average annual earnings of an investment. Unlike average annual return, which simply calculates the total return over a period divided by the number of years, annualized total return takes compounding into account. This makes it a more accurate reflection of how well an investment has performed over time. By knowing the annualized total return of an investment, investors can compare its performance to other investments, even if they were held for different lengths of time. **How to Calculate Annualized Total Return** To calculate the annualized total return of an investment, you need to know the returns for a given period and the number of years the investment was held. Using these variables, you can use the following formula: Annualized Total Return = {(1 + Return1) x (1 + Return2) x (1 + Return3) ... x (1 + ReturnN)} ^ (1/N) - 1 For example, if a mutual fund had annual returns of 7%, 10%, 8%, and 12% over a four-year period, the annualized total return would be calculated as follows: Annualized Total Return = {(1 + 0.07) x (1 + 0.10) x (1 + 0.08) x (1 + 0.12)} ^ (1/4) - 1 = 1.09232 - 1 = 0.09232 x 100 = 9.23% By comparing the annualized total returns of different investments, investors can gain insight into which ones have performed better over time. **Annualized Total Return vs. Average Annual Return** While average annual return is a common metric for evaluating investments, it does not account for compounding like annualized total return does. Average return is simply the average of the returns over a period, while annualized total return reflects the impact of compounding on investment performance. For example, a fund that had returns of 12%, -20%, and 15% over three years would have an average annual return of 2.33%, but an annualized total return of approximately 1.00%. In conclusion, annualized total return provides a more accurate picture of an investment's performance over time. By considering this metric along with other factors, investors can make more informed decisions about where to allocate their funds.