Average Return Calculator

Understanding Average Returns: Simple vs. Geometric

When analyzing the performance of an investment portfolio, mutual fund, or stock, the "average return" can be calculated in two very different ways. This Average Return Calculator shows you both, highlighting why the standard "Simple Average" often paints an overly optimistic picture compared to the "Geometric Average" (or CAGR).

1. Simple Average (Arithmetic Mean)

This calculates the sum of all annual returns divided by the number of years. It assumes that returns are independent of each other, which is not how compound interest works.
Formula: $(R1 + R2 + ... + Rn) / n$

2. Geometric Average (CAGR)

This represents the constant rate of return that would have produced the same final value from the starting value over the investment period. It accounts for the effects of compounding and volatility. **This is the number that matters for your wallet.**
Formula: $((1+R1) \times (1+R2) \times ... \times (1+Rn))^{(1/n)} - 1$

The "Volatility Drag" Trap

Consider this classic example:

• Year 1: You gain 50%. ($100 becomes $150).
• Year 2: You lose 50%. ($150 becomes $75).

Simple Average: $(50\% - 50\%) / 2 = \mathbf{0\%}$. (Sounds like you broke even).
Actual Result: You started with $100 and ended with $75. You lost money!
Geometric Average: Roughly -13.4%. This accurately reflects your loss.