What Does Annualize Mean?
Annualize means to express a rate in terms of its annual equivalent.
How Does Annualization Work?
The concept is best illustrated with an example:
Assume a portfolio generates a 1% return in one month. The monthly rate can be annualized by multiplying 1% by 12 (because there are 12 months in one year) to produce a 12% annualized return. note that this number is just an estimate of what the portfolio's return would be if its performance was exactly the same for 12 months. It is not a measure of the portfolio's actual return.
To calculate an annualized return for an investment that compounds, use the following formula instead: ((1 + R) N – 1), where R is the periodic rate and N is the number of periods in one year.
Why Does Annualization Matter?
Annualizing returns makes it easier to compare them across time periods or among different companies, portfolios, stocks, etc. If you are trying to choose between two gold funds, one with an annualized return of 10% and one with an annualized return of 11%, all things being equal, you'd likely choose the fund with the higher annualized yield.
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