According to Investopedia a return on investment (ROI) “

*is a performance measure used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments. To calculate ROI, the benefit (return) of an investment is divided by the cost of the investment; the result is expressed as a percentage or a ratio.*”

*The return on investment formula:*

**“Average” Returns vs “Annualized” Returns**

*actual*return. Let’s take a closer look using actual numbers, assume you invest $500 then by the end of the first year after a 50% loss you would have $250

__less than__your starting value of $500 which is a

**net ROI of -25% not the commonly advertised 0%**.

__simple__average, and it never calculates the

*actual return*whenever there is a negative year involved.

*FACT: The average return is used by most financial institutions, so in the event there is a negative year, it will show a return that is larger than the actual return. In some cases, the average return could be positive while the actual return is negative.*In short, when calculating the average return, Investment A that has a yearly return of 11% may actually have performed worse than Investment B that has a yearly return of 10%, if Investment A had a negative/s year/s and investment B did not. To get a true apples to apples comparison AND the actual return of an investment make sure to use the annualized return method of calculation.

True investing makes sense. Learn how

*actual returns*can really help you achieve financial security by attending one of our events.

Click the image to the right to learn more about the annualized return and how it is calculated. Click here to use a CAGR calculator (you will be directed offsite). |