To properly evaluate an investment, you need to know how it's performing. Knowing the percentage gain of the investment offers performance data, but it doesn't allow you to compare investments with differing durations. As an example, if you could realize a 10 percent gain on a one-month investment or a 25 percent gain over a year, which would you prefer? The one-year investment gives a higher overall return, but you're committed to the one-month investment a twelfth the time, which means you could reinvest and potentially make considerably more. By calculating an annualized gain, you can compare both investments with equivalent time periods.
1. Divide the final value of the investment by the original investment amount. This gives you a gain factor for the time period in which you invested. As an example, if you invested $10,000 and it grew to $11,000 in just 30 days, then your gain factor for that 30-day period would be 1.1.
2. Divide 365 by the investment's time period, in days. It doesn't matter if the time period is less than or greater than a year; the calculation will still work. In the example, 365 divided by 30 gives you 12.167.
3. Raise the gain factor to the power of this previous calculation. On a business or scientific calculator, you would enter the gain factor, press the "X^y" button and enter the exponent. In the example, you would raise 1.1 to the power of 12.167 to calculate 3.189.
4. Subtract one from this number and multiply by 100 to calculate the annualized gain. In the example, you would get an annualized gain of 218.9 percent. If a one-year investment gave you a 25 percent gain, then it's now obvious which is the better opportunity.
Items you will need
- Business or scientific calculator