# What is an Annual Return?

Tricia Christensen

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.

Tricia Christensen

Tricia has a Literature degree from Sonoma State University and has been a frequent wiseGEEK contributor for many years. She is especially passionate about reading and writing, although her other interests include medicine, art, film, history, politics, ethics, and religion. Tricia lives in Northern California and is currently working on her first novel.

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icecream17

Crispety -I wanted to say that with many properties it may be difficult to determine the true value of the property because of the flood of foreclosures on the market.

I wanted to add that when you invest in equities like mutual funds or stocks you should review the performance of the sector to determine how your holdings are performing against the average in the sector.

A great benchmark is the S&P 500 annual return. This index profiles the average of the largest capitalized stocks in the U.S. stock market.

You can also buy index funds that mirror the S&P 500 like the Vanguard Total Stock Market Index or the Vanguard S&P 500 index.

Both of these funds offer a diversified holding and they require a minimum of \$3,000 in order to begin investing.

Index funds like this have very low expenses because they are not actively managed. This will boost your rate of return significantly.

The average expense ratio of a typical mutual fund is over 1%, while these funds only charge .18% which is a fraction of what the average mutual fund charges.

I always go to the Morningstar site to find out information on mutual funds and stocks. They will calculate the annual return of a fund as well as the five year and ten year average of the fund.

Crispety

The annual return on your investment should provide enough of a gain to continue holding the investment.

For example, if you are holding investment real estate the annual rate of return would be based on the CAP rate or the capitalization rate.

This is simply the income after expenses divided by the value of the property.

When buying income property it is important that you have a cap rate range in mind. This will help you determine if the property will be profitable enough for you to purchase.

There are many real estate investor software that will help you by calculating the annual cap rate for you.

Keep in mind that the income after expenses is what is calculated not the gross income. This is important to note because if there is not a distinction you could be purchasing something that is not as profitable as you imagined.