To annualize a return, divide the ending value by the beginning value, raise that result to the power of one divided by the number of years you held the investment, and subtract one. Written out: Annualized Return = (Ending Value ÷ Beginning Value) ^ (1 ÷ Years) − 1. That single formula converts a gain or loss over any time period into a standardized twelve-month rate, so a three-month stock trade and a five-year bond can be compared on the same scale.
The Three Numbers You Need
Beginning value, ending value, and the length of time between them. That’s it.
The beginning value is what the investment was worth on the day you bought in or the day your measurement period starts. The ending value is what it’s worth now, or what you received when you sold. Both figures should come from brokerage or bank statements, which typically report positions at least quarterly.
Dates matter more than most people expect. You need the exact day in and the exact day out. A holding period of 88 days versus 92 days changes the annualized result noticeably on short-term trades. Convert your holding period into a decimal fraction of a year (90 days becomes 90/365 = 0.2466 years), or keep it in days and use the 365/days version of the exponent. Either works if you stay consistent.
If the investment paid dividends or distributions, your ending value needs to reflect that income. For mutual funds and ETFs, performance reporting usually already assumes dividends were reinvested at the price on the distribution date. For individual stocks, dividends are typically treated as cash added to your ending value rather than reinvested and compounded.
Annualizing a Return Held Less Than a Year
For holdings shorter than twelve months, the exponent projects what your short-term result would look like sustained across a full year:
Annualized Return = (Ending Value ÷ Beginning Value) ^ (365 ÷ Days Held) − 1
Say you bought a stock at $50 and sold it 90 days later at $53. The total return multiple is 53 ÷ 50 = 1.06. The exponent is 365 ÷ 90 = 4.0556. Raise 1.06 to the 4.0556 power and you get about 1.2690. Subtract one and the annualized return is roughly 26.9%.
A 6% gain over three months translates to nearly 27% annualized because the formula assumes you could replicate that pace four times over. In a spreadsheet, the cell would be =(53/50)^(365/90)-1. On a scientific calculator, enter 1.06, hit the exponent key (usually y^x or ^), enter 4.0556, and subtract 1.
Annualizing a Return Held More Than a Year
For multi-year holdings the exponent shrinks cumulative growth down to a per-year rate. Convert the holding period to a decimal first: 30 months is 2.5 years, four years and 73 days is about 4.2 years.
Annualized Return = (Ending Value ÷ Beginning Value) ^ (1 ÷ Years) − 1
Suppose you put $20,000 into a mutual fund and it grew to $29,000 over 3.5 years. The total return multiple is 29,000 ÷ 20,000 = 1.45. The exponent is 1 ÷ 3.5 = 0.2857. Raise 1.45 to the 0.2857 power to get about 1.1125. Subtract one and the annualized return is about 11.25%.
The fund didn’t actually earn 11.25% every year. Some years it may have gained 20%, others lost 5%. The annualized figure gives you the steady rate that would have produced the same final result if growth had been perfectly even. That’s what makes it useful for comparison, and it’s also why you shouldn’t mistake it for what happened in any single year.
This is geometric compounding, not simple averaging. A 10% gain followed by a 10% loss doesn’t leave you flat; it leaves you down 1%. The geometric formula captures that. A simple average would misleadingly report 0%.
When the Number Misleads You
The formula assumes your short-term result can be sustained for a full year, and that assumption gets less realistic the shorter your window. A 1% gain over five days annualizes to over 100%. A 3% loss in a single week annualizes to about −79%. Neither figure tells you anything useful about the investment’s likely trajectory.
As a rule of thumb, treat annualized figures from holding periods under about 90 days with heavy skepticism. The shorter the period, the more random noise dominates. A stock that bounced 4% in a week on a single earnings surprise hasn’t demonstrated anything about its annual potential.
The formula also flattens volatility by design. An investment that returned 40% one year and lost 20% the next produces an annualized return of about 5.8%. Mathematically correct, but it hides the ride. If you couldn’t actually have held through the drawdown, the annualized number overstates what you would have earned in practice.
Stripping Out Inflation and Fees
A nominal annualized return doesn’t tell you how much purchasing power you gained. To find the real rate, use the Fisher equation:
Real Return = ((1 + Nominal Return) ÷ (1 + Inflation Rate)) − 1
If your annualized return is 8% and inflation ran 2.7% over the same period, then (1.08 ÷ 1.027) − 1 works out to about 5.16%. That’s your actual increase in buying power. The Consumer Price Index rose 2.7% from December 2024 to December 2025, a reasonable recent benchmark.1Bureau of Labor Statistics. Consumer Price Index: 2025 in Review
Fees compound over time the same way returns do, so the gap between gross and net widens the longer you hold. Management fees on actively managed funds commonly run 1% to 2% annually, and performance fees on certain funds can take 15% to 20% of profits above a set threshold. An annualized gross return of 9% can easily become 7% or less once expenses come out. Subtract all fees, commissions, and fund expenses from your ending value before running the formula. The gross number might feel better; the net number is what you kept.
Time-Weighted vs. Money-Weighted Returns
The standard formula works cleanly when you make one investment and let it sit. If you added money partway through or pulled some out, the timing of those cash flows affects your actual result and the calculation gets more complicated.
A time-weighted return strips out the effect of your deposits and withdrawals, measuring pure investment performance as if no cash ever moved. This is the standard for evaluating fund managers because it isolates their decisions from yours. A money-weighted return (also called an internal rate of return) gives more weight to periods when more of your money was invested, reflecting what you personally experienced.
The two can diverge. If you added a large sum right before a downturn, your money-weighted return will look worse than the time-weighted return even though the underlying investment performed identically. For comparing your portfolio against a benchmark, use time-weighted. For understanding what your actual dollars earned, use money-weighted. Most brokerage platforms report time-weighted by default, so ask specifically if you want the other version.
How the Holding Period Affects Your Tax Bill
The same holding period you plug into the annualization formula also determines how the gain is taxed. Investments held more than one year qualify for long-term capital gains rates, which currently top out at 20% for most assets. Investments held one year or less are taxed as short-term capital gains at your ordinary income tax rate, which can run as high as 37%.2Internal Revenue Service. Topic No. 409, Capital Gains and Losses
Count the days correctly: start counting from the day after you acquired the asset through and including the day you sold it.2Internal Revenue Service. Topic No. 409, Capital Gains and Losses A strong annualized return can look very different once tax comes out. A 15% annualized return realized after eight months might lose more than a third to the short-term rate. The same return realized after thirteen months could face 0% or 15%, depending on your income. The annualized figure is what you use to compare investments; the after-tax return is what actually hits your account.