Introduction: Why is Annualized Rate of Return the Gold Standard for Investment Comparison?

In the world of investing, comparing the return rates of different options is crucial. However, directly comparing total return rates can often be misleading due to varying investment periods.

• Investment A: 120% total return over 6 years
• Investment B: 200% total return over 10 years

Which one performs better? The answer is not obvious. Annualized Rate of Return is precisely the key tool to solve this problem. It converts investment returns of different periods into annualized compound growth rates, allowing us to make fair comparisons on the same standard.

This article will explain in depth:

• The core concept and calculation formula of annualized rate of return
• How to calculate it quickly using Excel
• The essential differences from annual return, IRR, CAGR, and dividend yield
• The latest ranking of annualized returns for US and Taiwan stocks/ETFs
• 5 practical strategies to effectively improve the annualized return of your investment portfolio

I. Core Concept of Annualized Rate of Return: Why is it the "Universal Yardstick" for Investment Comparison?

1. What Exactly is Annualized Rate of Return?

Annualized Rate of Return is an indicator that measures investment returns on a 1-year basis. The core difference between it and the ordinary "investment return rate" is that it incorporates the time value and compound interest effect, enabling fair comparison of returns across different investment periods.

👉 For example:

• Investment A: 120% return over 6 years
• Investment B: 200% return over 10 years

Although Investment B seems to have a higher total return, after calculating the annualized rate of return, Investment A (13.86%) is actually better than Investment B (11.59%). This is the value of annualized rate of return—it allows investments with different periods to "stand on the same starting line."

⚠️ Note: According to the Global Investment Performance Standards (GIPS), returns on investments held for less than 1 year must not be annualized to avoid misleading decisions with "predictive returns."

2. Annualized Rate of Return vs. Annual Return: Don't Confuse Them!

Illustrative Example:

An investment grows from $100,000 to $133,100 over 3 years.

• Annualized Rate of Return: ≈10%
• Annual Return: Could be +15% in the first year, -5% in the second, and +10% in the third. The annualized rate smooths out such fluctuations.

II. Calculation Formula for Annualized Rate of Return: Learn in 3 Steps + Excel Practice

1. Core Calculation Formula

Annualized Rate of Return (%) = [(1 + Total Investment Return Rate) ^ (1 / Investment Years)] - 1

Where:

• Total Investment Return Rate = (Final Value - Initial Investment) / Initial Investment

2. Example Analysis: Investment A vs. Investment B

Now, let's reveal the answer to the initial question:

• Investment A (6 years, 120% total return):
  • Annualized Rate of Return = [(1 + 1.2) ^ (1/6)] - 1 = [2.2 ^ 0.1667] - 1 ≈13.86%
• Investment B (10 years, 200% total return):
  • Annualized Rate of Return = [(1 + 2.0) ^ (1/10)] - 1 = [3.0 ^ 0.1] - 1 ≈11.59%

Conclusion: Despite Investment B having a higher total return, Investment A has a higher annualized rate of return. This highlights the great advantage of annualized rate of return in cross-period comparisons.

3. How to Calculate in Excel? (With Template)

Just use a simple formula:

=((1+TotalReturn)^(1/Years))-1

Steps:

1. Enter the above formula in an Excel cell.
2. Replace "TotalReturn" and "Years" with your actual data.
3. Press Enter to get the result.

4. Advantages and Disadvantages of Annualized Rate of Return

III. In-Depth Comparison: Annualized Rate of Return vs. IRR vs. CAGR vs. Dividend Yield

1. Annualized Rate of Return vs. Internal Rate of Return (IRR)

Many people think they are the same, but the key difference lies in cash flow handling.

• Annualized Rate of Return: Only considers initial investment and final value. Ignores any cash flows during the period.
• Internal Rate of Return (IRR): Considers all cash flows during the period (e.g., dividends, distributions, additional investments) and calculates the discount rate that makes the Net Present Value (NPV) zero.

Conclusion: For investments with regular cash flows (e.g., holding stocks for dividends, regular investments), IRR is a more accurate indicator. Annualized rate of return is more suitable for simple investments with one-time input and redemption at maturity.

2. Annualized Rate of Return vs. Compound Annual Growth Rate (CAGR)

Their calculation formulas are almost the same and are often used interchangeably. The subtle difference is:

• CAGR emphasizes the smoothed growth rate between initial value and final value, often used to describe growth in macro indicators like company revenue or GDP.
• Annualized Rate of Return is a specific application of CAGR in the investment field with a clearer context.

3. Annualized Rate of Return vs. Dividend Yield

• Dividend Yield: Measures the proportion of current cash flow income (e.g., dividends, interest) to the current market price. Does not consider capital gains/losses.
• Annualized Rate of Return: Measures the total return over the entire holding period, including capital gains/losses and all income.

Simply put: Dividend yield looks at "how much money you can get now," while annualized rate of return looks at "how much money the entire investment has earned."

IV. Latest Rankings of Annualized Returns for ETFs and Stocks (2024)

1. Top 10 US ETF Annualized Returns (Past 10 Years)

Source: ETF.com, as of June 2024

Key Insight: Top performers are highly concentrated in semiconductor and technology sectors, reflecting the tech bull market of the past decade. However, high returns come with high volatility.

2. Annualized Returns of Popular US ETFs

Interpretation: QQQ outperformed the broader market (SPY/VOO) due to its heavy weighting in tech giants. VTI, covering the entire U.S. market, showed stable performance. VT, as a global allocation, had lower returns but diversified risks.

3. Top 10 Taiwan ETF Annualized Returns (Since Inception)

Source: MONEYDJ, as of July 2024

Note: High returns mostly come from leveraged, inverse, or thematic ETFs with extremely high risks. 0050 (Yuanta Taiwan 50), as a benchmark for the broader market, has an annualized return of approximately 11.53% since inception, showing stable performance.

4. Top 10 US Stock Annualized Returns (Past 10 Years)

Source: Yahoo!Finance

Insight: Leaders in the AI and semiconductor sectors (such as NVDA, AMD) have generated remarkable returns.

5. How to Check Annualized Rate of Return?

• US Stocks: Yahoo Finance, Google Finance, Morningstar, ETF.com, various brokerage platforms.
• Taiwan Stocks: MoneyDJ, Goodinfo!, CMoney, various brokerage platforms.
• Key: Pay attention to the time range and calculation method of the data, as there may be differences between sources.

V. How to Check Annualized Rate of Return? What's Considered High? How to Improve It?

1. Recommended Tools for Quick Annualized Return Checks

• US Stocks: ETF.com (enter ticker → check "Performance"), Yahoo Finance
• Taiwan Stocks: MoneyDJ, CMoney (search for "ETF Annualized Return")

2. What's Considered a High Annualized Rate of Return? Classified by Risk Level

3. How to Improve Annualized Rate of Return?

Improving annualized rate of return is not easy, but the following strategies can systematically increase your chances:

Strategy 1: Optimize Asset Allocation and Embrace Diversification

• Core: Allocate across different assets such as stocks, bonds, and real estate based on risk tolerance.
• Action: Regularly (e.g., annually) review and rebalance the portfolio to maintain target proportions and avoid over-concentration.

Strategy 2: Adhere to Long-Term Holding and Regular Investment

• Core: Time is a friend of compound interest; avoid frequent trading.
• Action: Adopt a "regular fixed-amount" strategy to smooth market fluctuations and reduce timing risks.

Strategy 3: Maximize the Power of Compounding

• Core Idea: Reinvest investment returns (such as dividends and interest) instead of withdrawing them for consumption.
• Action: Enable the "Dividend Reinvestment Plan (DRP)" for ETFs or stocks.

Strategy 4: Strictly Control Costs

• Core Idea: Lower fees directly increase net returns.
• Action: Prioritize index ETFs with low management fees and reduce unnecessary transaction costs.

Strategy 5: Continuous Learning and Evaluation (Advanced)

• Core Idea: For individual stocks, it is necessary to continuously track fundamentals.
• Action: Regularly review the financial reports of held companies and industry trends. If fundamentals deteriorate, adjust decisively.
• Important Reminder: Strategies such as "value investing", "growth investing", and "using leverage" are extremely risky and only suitable for experienced investors. Do not imitate blindly.

Summary

The annualized rate of return is the "translator" of investments, allowing fair comparison between investments of different durations and types. But remember: Historical annualized returns ≠ Future returns. Combining your own risk preference, long-term holding, and cost control is the core of improving real returns.

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Frequently Asked Questions (FAQ)

Q1: Is a negative annualized rate of return meaningful?​​

Yes, it does! An annualized return of - 5% means the assets shrink by 5% every year. Be vigilant and set stop - loss.

Q2: Can I buy an ETF with a small size but high returns?​​

Note! ETFs with a size of less than 1 billion are prone to liquidity risks. It is recommended to hold them together with SPY/VOO.

Q3: Mortgage interest rate is 4% vs investment annualized rate is 6%. Should I repay the loan or invest?​​

Key formula: If (Investment annualized rate - Mortgage interest rate) > 2%, prioritize investment!

Q4: Is a high annualized rate of return necessarily good?

Not necessarily. It needs to be combined with risks: A semiconductor ETF with an annualized rate of 28% has high volatility, while a broad-based ETF with 12% is more stable and suitable for beginners.

Q5: Do short-term investments need to calculate the annualized rate?

No. The annualized rate of investments held for less than 1 year will exaggerate returns (for example, earning 5% in 1 month with an annualized rate of 60% is meaningless in practice).

Q6: How to choose funds using the annualized rate?

Prioritize looking at the 5-year+ annualized rate (to avoid short-term luck), and compare the rankings of similar funds (top 30% is better).