Is an 'Annualised' Return the Same as an Average?

Annualised figures illustrate the difficulty of recouping big losses

Karen Wallace 21 September, 2011 | 8:56AM

Question: Morningstar's longer-term return data are all "annualised" returns. Is annualised return the same as average return?

Answer: Well, the short answer is yes. But it's a certain type of average, and that distinction matters.

To use a simple example, let's pretend you invested exactly £1,000 in a FTSE 100 Index fund on Jan. 1, 2008. The fund promptly lost 37% that year (ouch!). But then it reversed course and shot up 26.5% in 2009, and then it gained nearly 15% in 2010. What is the annualised three-year return of your investment? And more important, have you made money?

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About Author

Karen Wallace  Karen Wallace is an editor with Morningstar.

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