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S&P 500 Annualized Return Formula:
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The S&P 500 annualized return measures the geometric average amount of money earned by an investment each year over a given time period. It shows what an investor would earn over a period of time if the annual return was compounded.
The calculator uses the annualized return formula:
Where:
Explanation: The formula calculates the geometric average annual return that would be required to grow the past index value to the current index value over the given time period.
Details: Annualized return is crucial for comparing investments over different time periods. It smooths out performance results to show the average annual return, making it easier to compare investments regardless of their time horizons.
Tips: Enter current and past S&P 500 index values in points, and the time period in years. All values must be positive numbers.
Q1: What's the difference between annualized return and average return?
A: Annualized return accounts for compounding, while average return simply divides total return by number of years. Annualized return is generally lower than average return for volatile investments.
Q2: What is a good annualized return for the S&P 500?
A: Historically, the S&P 500 has returned about 10% annually before inflation and 7% after inflation. Returns can vary significantly over different time periods.
Q3: Does this include dividends?
A: No, this calculator uses only price returns. For total returns (including dividends), you would need to account for reinvested dividends in the current index value.
Q4: Why use annualized return instead of total return?
A: Annualized return allows for comparison between investments of different durations, while total return only shows the overall percentage gain.
Q5: How does inflation affect these returns?
A: The calculator shows nominal returns. To get real returns (inflation-adjusted), you would need to subtract the inflation rate from the annualized return.