Annualize to compare, but beware short windows
CAGR makes different holding periods comparable, but annualizing a brief spike produces fantasy numbers. Judge it over real timeframes. Project forward with the savings plan calculator.
Annualizing keeps returns comparable
+15% in four months and +30% in fourteen months β which trader did better? Annualized, the first is about +52% per year, the second +29%. Time-normalizing is the only way to compare results across different holding periods, and it's the number funds are forced to report for exactly that reason.
Formula: (1 + return)^(365/days) β 1. The compounding exponent is what surprises people β a 10% gain in a month annualizes to 214%, not 120%, because compounding twelve 10% months multiplies rather than adds.
The abuse case: annualizing short windows. A lucky +8% week annualized is +5,300%, a number that means nothing because no edge persists 52 straight weeks. Annualize periods of six months or more; anything shorter is marketing, not measurement. This cuts both ways β a rough month annualized looks apocalyptic and is equally meaningless.
FAQ
What is CAGR? Compound annual growth rate = (end Γ· start)^(365/days) β 1. It converts any total return into the equivalent smooth yearly rate, so you can compare investments held for different periods.
Why can annualized returns be misleading? Because annualizing a short, lucky period exaggerates it β a 20% gain in a week annualizes to thousands of percent that won't repeat. Use CAGR over meaningful periods, not a hot week.