Rate of Return
Rate of return is the percentage gain or loss on an investment over a given period — the basic building block for measuring and comparing investment performance.
Why it matters
- A single year's rate of return can be misleading; long-run annualized returns give a fuller picture.
- Nominal rate of return doesn't account for inflation — see Real Return for the inflation-adjusted version.
- Comparing investments requires comparing returns over the same time period and risk level.
Simple example
- An investment that grows from $10,000 to $10,800 in a year has a 8% rate of return for that year.
- A 7% average annual rate of return over 20 years does not mean every year returned exactly 7% — some years were higher, some lower or negative.