18
Becoming Money $mart
Average Rate of Return
Savings and other investments normally do not earn the same rate of return
each year over a long period of time. The rate varies over the years. One year
you may earn 2%; the next year you may earn 5%. The average rate of return
is the percentage that your savings or other investments earn over a period of
time. To fi nd the average rate of return, add the amount of increase or decrease
for each year and get a total. Then divide the total by the number of years of
the investment to get the average return amount. Divide the average return
amount by the number of years to get the average rate of return.
Total Amount Earned ÷ Number of Years = Average Return Amount
Average Return Amount ÷ Number of Years = Average Rate of Return
There is no guaranteed rate of return on most types of investments. The
return on stocks and interest rates go up and down. When investing over a
period of 30 to 35 years, an average rate of return of 7% to 9% is not unrealistic.
Suppose you are considering an investment in company stock. You should
look at the rate of return for the past several years if possible. Doing so will
give you a better idea of how your investment is likely to grow than just
looking at the rate of return for the previous year or two.
Example 1-2
Negative numbers are shown in parentheses and represent losses for those years.
Investment $1,500
Year Amount
1 $75.00
2 50.00
3 100.00
4 100.00
5 75.00
6 50.00
7 (50.00)
8 (25.00)
9 25.00
10 50.00
11 100.00
12 150.00
13 135.00
14 140.00
15 + 125.00
Total amount $1,100.00
Number of years ÷ 15
Average return amount $73.33
Number of years ÷ 15
Average rate of return 4.89%