Rate of Return

Rate of return expresses how much an investment grew or shrank as a percentage. Turn 1,000 into 1,200 and the return is 20%. Being a ratio rather than an amount, it lets you compare investments of different sizes.

Always match the period when comparing. A 50% return means something entirely different over one year than over ten. That is why annualised return, or CAGR, is the standard measure.

Averages hide a trap. Fall 50% then rise 50% and 1,000 becomes 750 — the arithmetic average is zero, but you are down 25%. Recovering a loss always requires a larger percentage gain than the loss itself.

And the quoted return is not what reaches your pocket. Trading costs, management fees and tax come out first. Over decades, a single percentage point of annual fees changes the final number dramatically. So when choosing a product, check the total cost that comes out every year before you admire the past performance printed in the advert.