# What is an Average Annual Return?

Malcolm Tatum

An average annual return is the amount of profits accumulated over a period of several years, divided to determine the average amount earned for each year under consideration. The basic formula for calculating this return involves adding the actual return generated during each year involved, then dividing that figure by the number of twelve-month periods under consideration. A figure of this type is especially helpful with assessing the value gained from a given investment over several years, even when the performance of that investment fluctuates over time.

While the calculation of an average annual return is normally associated with using data from several successive twelve-month periods, it is also possible to use this same approach to project the potential return over the course of several upcoming years. This is accomplished by taking the historical data associated with recent time periods, and converting them to an annual figure. For example, an investor could look at the earned return on a given security over the past two quarters, add those returns, and then multiply the sum by two. This will supply a projected annual return that can be applied to the upcoming year, assuming there is good reason to think the security will at least hold its current value.

There are several reasons why an investor would want to take the time to determine the average annual return. One has to do with maximizing the total worth of the investment portfolio. By determining the annual return on each investment, it is possible to decide if a given security is earning enough profit to hold on to the current shares, sell off a portion of the shares, or acquire additional shares. Get started