|
Re: .0
7.97%. The only way I know how to do this is break out the
calculator, pretend you're starting with $1000 and, in this case,
multiply it by 1.2, .9, 1.3, .95 and then 1.1 to see how many dollars
you'd end the five years with. Then take that answer ($1,467.18 in
this case) and use the financial buttons to figure the average annual
return.
You asked if the return was 9%. I presume you got that number by
adding up all the returns (for a total of 45%) and divided it by the
number of years to get 9%. The problem with doing this is that a gain
and a loss of equal percentages don't cancel each other out. For
example, start with $1,000 and think of a fund that goes down 50% one
year and then up 50% the next year -- how much do you end up with?
No, not $1,000 but rather $750. The first year's loss knocked your
balance down to $500 and the second year's gain was 50% of your initial
balance for _that_ year, which means you gained $250 that year to bring
you up to a total of $750.
Your second question of "what does it mean?" is an interesting one.
No, it does not mean that each year the share values grew by 9%.
(7.97%, actually.) What the average return rate is useful for is
comparing this fund to others. For example, if another comparable
fund (ie. roughly the same investment goals) averaged 6% over this
exact same period, you could surmise that the "7.97% fund" had better
management than the other. If, on the other hand, comparable funds
went up an average of, say, 12% annually over this same time period,
then perhaps this fund's managers are making decisions of less than
average quality and you're better off with the money elsewhere.
What the numbers absolutely do not mean, of course, is what this fund's
return rate might be like in the future.
-craig
|