Finding the annual rate of return is a great way to compare different investments of different sizes and different time periods. For example, you might have held a smaller investment in a stock for six years and a larger investment in real estate for two years. To determine which investment, on average, is performing better, you need to determine the annual rate of return.
Step 1
Calculate your gain or loss by subtracting the initial value of your investment from the final value of the investment. For example, if you bought land for $200,000 and sold it for $221,000 two years later, you would subtract $200,000 from $221,000 to find you had a profit of $21,000.
Step 2
Divide the gain or loss by the original value of the investment. In this example, you would divide the $21,000 gain by the original $200,000 value to get 0.105.
Step 3
Add 1 to the step 2 result. In this example, you would calculate 1 plus 0.105 to get 1.105.
Step 4
Divide 1 by the number of years you held the investment. In this example, you would divide 1 by 2 to get 0.5 because you held the investment for two years.
Step 5
Raise the answer from step 3 to the power of the step 4 result. In this example, you would raise 1.105 to the 0.5th power to get 1.051189802.
Step 6
Subtract 1 from the step 5 result to find the annual rate of return. In this example, you would subtract 1 from 1.051189802 to get 0.051189802, or about 5.12 percent per year for the annual rate of return.