When you're on a quest to explore different investment avenues, you'll frequently encounter investment product returns presented in an annualised format. The industry has embraced annualised returns as a standard for many reasons.
We'll examine these reasons using our Intelligent Investor Australian Equity Growth Fund (ASX: IIGF) as a prime example. You can learn more about IIGF here.
Annualised Returns: A Glimpse Through Time
The concept of annualised returns can be likened to checking the average pace of runners in a marathon at different time intervals. It's akin to stopping the clock during a marathon to observe the average pace of different runners, allowing for a fair comparison, regardless of the distance each has run so far.
Why Annualised?
Consider four different funds, each boasting a total return of 60% ‘since inception’ but with varying active durations. To level the playing field for comparison, we calculate the annualised return. Here’s how they measure up:
Fund | Total Return Since Inception | Years Since Inception | Annualised Return Since Inception |
A | 60% | 3 | 16.96% |
B | 60% | 4 | 12.91% |
C | 60% | 5 | 10.36% |
D | 60% | 6 | 8.59% |
However, the ‘typical yearly return’ isn’t the actual yearly return.
For instance, Fund A might have sprinted ahead with a 60% return in the first year but paced at 0% in the next two years. Similarly, IIGF’s annualised return since inception stands at 10.55%, yet two of the three years saw returns lower than this.
Your Annualised Return Encounter:
The annualised return provides a snapshot when reviewing the performance of your chosen funds, like IIGF. However, your actual return could be painted with a different brush, influenced by your investment timing, distribution choices, and market conditions.
Distributions: A Key Player
Distributions are a significant part of your investment returns, and how you choose to manage them - either by taking them as cash or reinvesting - is a personal choice that should align with your goals, timeframe, risk tolerance, and individual circumstances.
Taking as Cash: When you opt to take distributions as cash, it's akin to cashing in some chips after a round of play. While this provides immediate liquidity, it pauses the compounding rhythm of your investment. It's a suitable choice if you require regular income from your investments, aligning with short to medium-term financial goals.
Reinvesting: On the other hand, choosing to reinvest your distributions is like adding more chips to the game, potentially enhancing your position for future rounds. When you reinvest, you purchase additional units in the fund, which in turn, can earn more distributions in the future - it's like having more cards in play. Over time, this strategy may lead to a more robust performance (read: return), especially if aligned with a long-term investment horizon.
This choice between taking distributions as cash or reinvesting them plays a pivotal role in shaping your investment narrative. More units through reinvestment mean an increased stake in the game, which could result in more substantial distributions in the future, assuming the fund continues to perform well.
Navigating Forward:
Understanding the concept of annualised returns and their interaction with your investment journey in IIGF or other funds can foster more informed decisions on your investment path.
We're here to ensure you have a clear understanding of how to navigate through these financial narratives.
Feel free to reach out with any questions; your understanding is the cornerstone of your financial empowerment.