Absolute and annualised return

Sharesight annualises returns weighting the length of time that each capital input has been invested for, by the amount of capital invested to determine the average years invested (AYI) for each dollar of capital. Example 1 below illustrates this calculation.

Returns can be annualised based on the principles of a simple annualised return or by using a compound annual growth rate (CAGR).

A simple annualised return simply divides the rate or return for the period by the number of years in the investment period. A compound annual growth rate calculates the year on year growth rate that would be required to achieve the same result. The table below provides an example of the differences between a simple annualised return and a compound annual growth rate.

The table in example 2 above illustrates that a 7% compound annual growth rate is approximately equivalent to a 10% simple interest rate over a 10 year period.

You can switch between these two methods in the settings for each portfolio. It’s important to understand which method you are using when comparing Sharesight returns to other returns that you might see externally, such as an index or a fund manager. These returns are typically expressed on a compound basis when annualised over more than one year. We recommend you use the compound method when comparing your portfolio returns with other external returns.

Avoiding extrapolation of short term volatility

Due to the short term volatility that exists in the Sharemarket, returns can be misleading or difficult to interpret in some circumstances.

The most obvious circumstance is where a short term result is extrapolated due to the process of annualisation.

For example, a share that increased in price by 5% in the first day of ownership would result in an annualised return of 1825%. Equally, if the price decreased by 5%, the annualised return would be -1825%, which appears counter-intuitive since it’s not possible to lose more than 100% of your investment.

A more subtle form of extrapolation can occur even when the total investment period is greater than one year, especially where there is a large variation in the amount of capital invested during the period. For example consider a holding where a relatively small sum of money was invested for the majority of the investment period but with a large gain or loss on a much larger sum of money invested shortly before the end of the period. In this case the average years invested will be relatively small, which again results in an unintuitively large gain or loss percentage even though the total investment period may be greater than one year.

To avoid this problem Sharesight simply divides the gain by the total amount of new, additional capital that the investor has contributed during the period. If this result is lower (in absolute terms) than the dollar weighted return, then a degree of extrapolation has occurred and the alternative methodology is used to offset this.

Notes

• In the above example, the average years invested is only 0.23 years since the majority of the capital was invested for only one month. This results in a gain of approximately 600% using a dollar weighted methodology. This appears unreasonable since the large gain was clearly a result of short term volatility. A more reasonable perspective is to consider that the investor generated a gain of $8300 on $6000 total investment capital.
• The alternate methodology is only applied where it yields a more conservative figure (ie only when it prevents extrapolation a short term gain or loss). The test for this is: (total_capital * av_yrs_held) < (total_new_capital). By definition, this methodology is only applied where the AYI is less than one year (note that in the above formula, total_new_capital can equal but never exceed total_capital).

Last modified on April 29, 2025 UTC