Glossary
Annualized return
A multi-year return restated as the steady yearly rate that would compound to the same result, making periods comparable.
An annualized return is the constant yearly rate of return that would turn an investment's starting value into its ending value over the same number of years. It converts a cumulative result such as "up 61% in five years" into a per-year figure ("about 10% a year"), so you can compare investments held for different lengths of time. When applied to a single price or revenue series it is usually called the compound annual growth rate (CAGR).
How it is calculated
For periods shorter than a year, annualizing scales the result up: a 2% gain in one month annualizes to (1.02)^12 − 1 ≈ 26.8%. That number is mathematically correct but rarely sustainable, which is why fund rules generally discourage advertising annualized figures for short periods.
Annualized versus average returns
The arithmetic average of yearly returns overstates what an investor actually earned whenever returns vary. Suppose a fund gains 50% one year and loses 50% the next. The arithmetic average is 0%, but $100 becomes $150 and then $75, an annualized return of (0.75)^(1/2) − 1 ≈ −13.4%. The annualized (geometric) figure is the honest one.
Two more cautions: a price-only figure leaves out dividends, so use total return data for stocks and funds; and an annualized number hides the path, saying nothing about how deep the drawdowns were along the way.