The value of investments can fall as well as rise, and you may get back less than you invested. Past performance is no guarantee of future results.

Annualised return definition

An annualised return is the average amount earned by an investment each year over a certain period of time if the annual return was compounded. Compounding means investment returns, from one year to the next, are dependent on each other.

Annualised return definition

An annualised return is the average amount earned by an investment each year over a certain period of time if the annual return was compounded. Compounding means investment returns, from one year to the next, are dependent on each other.

For example, if you invest £1000 in a FTSE 100 fund and the fund loses 25% in the first year, and then gains 15% and 12% in the two subsequent years, the average annual return would be:

(-25% + 15% + 12%) /3 = 0.6%

Based on this calculation, at the end of the third year your investment pot should stand at £1006. However, it doesn’t.

That’s because you lost 25% in the first year, meaning you started year two with a pot of £750. The return was 15% in year two, but that was on the £750, leaving you with £862.50. The return in year three was 12% on the £862.50, leaving you with £966 at the end of year three. That’s a three-year annualised return of -3.4%.

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