Have you ever invested and felt cheated with the returns you earned? You are not alone. One of the most frustrating parts of investing is understanding how you make money from it.

In this article, I will simplify how three common types of returns work. With this new information, you will make more informed choices before you invest. The returns to be discussed are:

- YTD Returns
- Annualized YTD Returns
- Annual Returns

YTD Returns

YTD stands for Year to Date. That is, the returns earned so far by an investment over a set period of time. For example, returns from January till today. Hence, it can serve as a measure of past performance but not an assurance of future performance.

A breakdown:

If ₦10,000 invested in January has gained ₦2,200 so far the YTD is 22%—because ₦2,200 is 22% of ₦10,000.
On the average that means 2% every month (2% for 11 months = 22). But this doesn’t assure the same investment will earn 2% in December.

Let’s move on to annualized YTD.

Annualized YTD Returns

Remember, I said YTD measures returns earned over a period of a time. Annualizing this is predicting what the investment will earn in a year if nothing changes. Let's use another example. If an investment’s YTD at the end march is 4% we can assume what the rate will be in December if nothing changes:

- January to March is 3 months.
- Divide 12 by 3 and you’ll have 4.
- Now, multiply 4% by 4–that’s 16% in annualized YTD.

That is, all things being equal the said investment is set to earn 16% by year-end. To reiterate, when someone quotes an annualized YTD for you be careful--it is based on current performance and what will actually happen.

Try this quiz (answer at the end of the article):

If an investment has earned 5% by day 10 of the year, what will be its annualized YTD? (A year = 365 days).

Annual Returns

This quite common but still a bit tricky. If you see 10% per annum for instance on July 1, 2020, it means that you’ll earn a daily breakdown of that till the end of the year. It doesn't mean you'll have full 10% of what you invested by year-end.

In clear terms, if you have 100,000 in investment at 10% per annum you’ll earn this:

(10% divided by 365) * 100,000 each day till the end of the year.

So, if you invested that amount in July for instance it doesn’t mean you’ll have 10% of ₦100,000 in December. It means you’ll earn the daily breakdown—of 10%—on the invested amount till December.

Quiz answer: 182.5%

[Adopted]