# Should monthly return or annualized be used?

If I have an average monthly return on capital of 5%, is it more common to use that number for performance or use the annualized value of 60%? I believe the annualized value is what hedge funds and banks use when quoting returns on their products.

5% doesn't seem like much when someone says their CD is returning 3%. For the CD, I believe the monthly is only 0.25%.

• What are you trying to accomplish? Typically you would just use annual numbers back from the current period and/or current YTD return because investments don't return a predictable value the way a CD does.
– quid
Sep 27, 2016 at 20:47

If I have an average monthly return on capital of 5%

If you have monthly data, then it might be better not to use your average return at all, but your compounded return based on those months. The average, being an average, will be pulled up in good months, so you may have one good month which brings the whole average up.

As an example, if you have three months of data with returns of 5%, 1%, and -3%, your average return is 1%. But the compounded return is 0.95%. 0.95% is a clearer indicator of how well the investments performed.

is it more common to use that number for performance or use the annualized value

More commonly I have seen the annualized number, because that is how things are typically reported -- you don't speak of quarterly returns when measuring the total value of an investment. But even then, you would compound it -- it would not be a straight multiple. Continuing the above example, the compounded annual return would be 11.98%, vs. the average monthly return multiplied by 12, which yields 12.00%. In this example, a 0.02% variance isn't a lot, but if you have large numbers offsetting your average, it can be a material difference.

I think interest is usually annualized. You also need to disclose how often it compounds.

Financial types will understand the difference and are able to do the math. They will also understand that 5% monthly doesn't exactly = 60% annually because of compounding. They will want to know how often the interest in valued. You could say "APY of 60% annually, compounded monthly".