How to annualize returns

Annualizing refers to finding an equivalent annual rate of return which results in the same gross rate of return currently experienced. For instance, if your portfolio grows 60% over four years, this is the equivalent of experiencing 12.5% growth per year.

It may be tempting to take 60% and divide by 4 to get "15% per year." This is true if your portfolio grows at 15% OF THE ORIGINAL VALUE each year. However, because of compounding, the interest you receive each year experiences growth in addition to the original portfolio.

Here is how to annualize:

where R is the gross return, in percent, and t is the number of years it took to get there.