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How to Calculate your Average Annual Rate of Return

November 20, 2014 - 2 comments

With Phase II of the Client Relationship Model (CRM II) fast approaching, Canadian investors will likely be on their own when trying to make sense of their reported rates of return (which will generally be meaningless for benchmarking purposes). The Modified Dietz rate of return calculator (available in the Calculators section of the blog) continues to be my recommended choice for DIY investors who want to calculate their annual return in a given year. But once they have a long string of annual returns, how do they go about calculating an average (or “annualized”) return?

Enter the geometric average annual rate of return. For those investors who still have their G-card, this can be a terrifying equation to tackle.  I’ll admit that the equation has no place in everyday life – it should be restricted to Excel spreadsheets and only allowed to see the light of day once a year (preferably after year-end).

Geometric Average Annual Rate of Return:

I find it best to just jump right into an example when trying to understand how to calculate this return. Let’s assume an investor has calculated the following annual returns over the past 10 years:

The investor now wants to calculate their 10-year annualized return in order to compare it to a suitable benchmark return. Here are the steps they would take using Excel:

Step 1: Enter the calendar year in column A

Step 2: Enter the corresponding annual returns in column B

Step 3: Enter an equation in column C that adds 1 to each annual return in column B:

=1+B2
=1+B3
.
.
.

Step 4: In a different cell, multiply all numbers from column C together (this can be done by using the PRODUCT function in Excel). Take the result to the power of 1 divided by the number of years in the measurement period (in our example, the number of years is 10). Subtract 1 from this result. This sounds confusing, but the equation in our example would simplify to:

=PRODUCT(C2:C11)^(1/10)-1

This would result in a 10-year annualized return of 5.00%

By: Justin Bender with 2 comments.
Comments
  05/01/2015 10:34:17 AM
Justin Bender
@David Hook - iShares Canada does post their monthly returns for their funds as well. Just visit their site and look-up the fund in question. Then follow these steps:

1. Click on the "Download" excel spreadsheet in the top right hand corner of the screen.
2. Click on the worksheet labelled "Performance" in the bottom left of the excel spreadsheet.

This should give you the monthly returns for the fund since inception.
 
  31/12/2014 9:00:41 AM
David Hook
Thanks for this, but cannot locate the Calculators section of the blog to get the spreadsheet. Has the structure changed?
Trying to do benchmark using total return for iShares XIC, XSP, XIN & XBB and hoping to find monthly data tables going back five years. Any sources for this that may be available. iShares USA seem to have just the thing, but not for Canadian ETFs.
Any ideas would be great.
 



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