What is an Annual Return?

A return or rate of return reflects the money you make or lose on an investment. This may be expressed as a percentage, or an actual amount in dollars. With many different types of investments, at the end of each year, you’re sent what is called an annual return, a statement of losses/profits for an entire year period. The return shows you how much you made on the investment, or how much you lost, and usually expresses a percentage, as well as a dollar amount showing you what your annual return rate was for the year.

With some investments an annual return statement may also be accompanied by a payment check representing what you made. This has to be counted as income on tax returns in the year that you receive it. When the return represents a loss, you may have that amount deducted from your total investment. You can in some cases take tax deductions when you lose money on an investment.

In many retirement plans that are invested into various funds, bonds, or stocks, the money you might make in a year is usually added to your current investment. It is not immediately accessible and is not taxable until you remove that money for spending purposes. Depending upon how your retirement plan is set up, and how spending is distributed, the money made will be distributed in proportional amounts to your various investments. For instance, if you have 30% of your investment in a money market fund, 30% of your annual return in dollars would be invested in that same fund.

Annual returns should not be confused with annualized returns. These are statements that may assess a portion of the year’s gains/losses based on the annual return percentage. Some investment firms send annualized returns on a monthly, bi-yearly, quarter-yearly or tri-yearly basis. The annualized percentage is considered a guess, since it can’t take the whole year into account. An annual percentage may be different depending upon increases or decreases in the value of your investments.

The basic formula for computing an annual return can be expressed as Total number of dollars at the end of the year (TD) from which the total number of dollars at the beginning of the year (BTD) is subtracted: TD-BTD. This gives you the return rate in dollars. To get the annual percentage TD-BTD is divided by BTD.

For instance, you might make $10 US Dollars (USD) in a year on a beginning dollar amount of $100 USD. Your TD for the year is now $110 USD. You would use the following expression to figure return percentage: (110 – 100) /100. You end up with 10/100, which is 10% return on your investment.

An annual return can tell you how effective your investments are, and when your funds are diversified, you might consider redistribution when you feel you can do better with other investments. It’s a good idea to look at these carefully so you can determine whether your money is wisely invested and making the most advantageous annual return.