### Investment Warrior Report Archive
Article

**Average Annualized vs.
Compounded Returns**

Many newsletters and
financial gurus tout their investment returns or trading history. I am
disappointed in the misdirection and hype that many in the
financial industry resort to in order to inflate returns.

A report of a return should
be examined using "annual COMPOUNDED return"
percentages. Misleaders in the financial trade use a measure
called "average annual return" to inflate performance .
Here is how "average annual return" is
misleading...

If you average just a
tad more than a 14% return for each year for 5 years you will have
doubled your money. Not just 70% (5 x 14%) but a 100% return on
your money. The reason is that there is compounding for each year that
your money made 14%. The unscrupulous will use the 100% return, divide
it by the 5 years and say that you made an "average annual
return" of 20%. If we carry our example out for another 5 years,
you now have made a 300% return and if you divide this by the 10 years
it seems to be an annual return of 30% per year. However, all of this
happens by just using a constant 14% annual compounded return for the 10
years.

So be aware of hype and
people promoting very high average "annual returns". They
usually are just using fairly common and average compounded returns for
a long period of time, and then taking the "average annual return
" by dividing the cumulative return by the number of years .
Insist on knowing the "Compounded Annual Return" for a
constant and true measure of comparison.

*NOW MORE THAN
EVER, REMEMBER AND COMMIT TO STRATEGY, PATIENCE, &
DISCIPLINE!*