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.
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.
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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.
Add 1 to the step 2 result. In this example, you would calculate 1 plus 0.105 to get 1.105.
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.
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.
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.