Average annual return refers to the average return (or profit) that an investment generates over a year. You will probably see the number displayed as a percentage.
Average annual returns can be calculated for investments such as stocks, bonds, mutual funds and savings accounts, and can be used to compare the performance of different investment options.
Here’s how to calculate this and get answers to some frequently asked questions about returns and returns on investing.
How to calculate average annual yield
To find the average annual return, you must first determine the initial investment amount. This is the initial amount you invested in the asset. Then determine the total return, or the amount of income you earned during the time you owned the asset. Then determine the holding period, the amount of time you owned the asset.
To calculate the annual return, divide the total return by the initial investment and multiply by 100 to get the annual return as a percentage. Then, depending on the number of years you have owned the property, divide the annual yield by that number to determine the average annual yield.
Here’s an example. Suppose you invested $12,000 in a bond and held that asset for five years. During that time you earned $4,000 in dividends, and this was appreciated to $18,000. This is how you calculate the average annual yield:
- Determine the initial investment: In this example, the initial investment is €12,000.
- Calculate the total return: You earned $4,000 in dividends and $2,000 in capital gains, which equates to $6,000.
- Determine the retention period: The retention period in this example is 5 years.
- Calculate the annual yield: The annual return is the total return divided by the initial investment multiplied by 100. In this example, take $6,000 and divide it by $12,000 to get 0.5. Then multiply by 100 to get 50 percent.
- Calculate the number of years you have held the investment: In this example that is 5 years.
- Divide the annual return by the number of years of operation to find the average annual return: In this example, take 50 percent divided by 5 years to get 10 percent.
- The annual average yield in this example is 10 percent.
Yield versus return
Although yield and yield are often used interchangeably in investing, they are not the same.
Yield, as described above, refers to the income earned by an investment, usually expressed as a percentage. You often hear that yield is used when talking about bonds or dividend stocks.
Return refers to the profit or loss of an investment over a specific period of time. Total return includes the total interest, capital growth, distributions and dividends of the investment.
These two numbers may differ if you compare a dividend-earning stock. You take into account the rise or fall in the share price when you look at the yield, but not the yield. With the latter you only look at the dividend income. However, the capital gains yield looks at the price appreciation of an investment, without taking into account other income, such as dividends.
What is a good average annual return?
There is no clear answer to the question of what a good average annualized return is. It depends on the investment, account and other factors. For example, the average annual return on bonds has historically been lower than that of stocks or real estate. However, bonds are generally considered less risky than stocks or real estate. So what is “good” may depend on your risk tolerance and other investment factors.
However, if you are trying to determine whether an investment is performing well, it is generally more useful to compare similar investments, such as large-cap stocks, with other large-cap stocks in the same sectors to find the average or typical return for the sector .
What is the average annual return on stocks?
There is no general answer to this question. In this case, that’s because each stock typically has its own average annual return – and there are thousands of publicly traded companies in the US, not to mention the global market.
However, there are certain benchmarks you can turn to. For example, the S&P 500, an index of approximately 500 large, publicly traded companies, has historically achieved an average annual return of 10 percent.
If you’re looking for the average annual return in the stock market, it’s not usually a number that’s calculated or used. Investors can use bond yields and dividend yields to compare investments.
