Annualising monthly returns is an important skill for all individual investors. Many brokerage statements tell you how your investments have done on a month-to-month basis, but these statements often do not provide information on annualised performance. Your investments may have done well in recent months, but they may be performing poorly on an annual basis because of one or two poor months at the beginning of the year. Such information can be difficult to extract from brokerage statements unless you are able to do the necessary calculations on your own.
- Skill level:
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Things you need
- Information on monthly returns for your investments
- Microsoft Excel
Change the monthly returns data from percentages to decimals and type the figures into Excel. For example, suppose you have three months of returns data for your investments: 1.51 per cent, -1.96 per cent and 1.12 per cent. Convert these numbers to decimals as follows: 1 + .0151 = 1.0151; 1 - .0196 = .9804; 1 + .0112 = 1.0112.
Multiply these numbers together to get your annual return. In this example, the annual return for your investments equals 1.0151 x .9804 x 1.0112 = 1.00635. You can quickly perform this calculation in Excel using the "Product" function. Type =PRODUCT( and select the cells containing the monthly numbers, close the parenthesis and press enter to calculate the annual return.
Subtract 1 from the annual return figure calculated in Step 2 and multiply it by 100 to convert the figure to a percentage: 1.00635 -- 1 x 100 = .635 per cent.
Tips and warnings
- Be sure to account for dividends when calculating your annual returns. Dividends are not reflected in the capital appreciation figures contained in your brokerage statements, but they are a very important source of return for most investors.
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