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How to annualise a return - YouTube
Channel: PensionCraft
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if you're an investor you compare the
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return on your investments all the time
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but you have to do it in a standardized
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way and we annualized returns for that
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reason unfortunately it's not linear in
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other words if you invest 1% for 12
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months you end up with more than 12% at
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the end because you've been reinvesting
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the amount as you go along so if you
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want to convert daily weekly monthly
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returns into annual returns we'll show
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you how to do that now very simply and
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very practically so here we go let's
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start with a really simple example what
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total interest would you receive if you
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get point zero one percent per day for a
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whole year but remember this is compound
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interest so we can't just do the
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following put 1 percent per day
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multiplied by 365 days in a year which
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would give us total interest of thirty
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six point five percent let's see why
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that doesn't work for compound interest
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let's start on day one with a hundred
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pounds we receive point one percent
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interest on that hundred pounds which is
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ten pence on the second day we receive
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point one percent interest on that
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hundred pounds and ten pence but that
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doesn't give us a hundred pounds and 20
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pence if you see there are two digits in
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red on the right-hand side we get an
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extra hundredth of a penny because we
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also receive point one percent interest
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on the ten pence interest from the day
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before so let's follow this day by day
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on the first day we will receive 10
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pence on the second day we'll receive 20
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pence
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plus that extra point zero one pence on
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day three we have 30 pence plus point
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zero three pence because of the
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compounding on day four we have an extra
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point zero six pence after 31 days we're
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really starting to see the benefit of
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compound interest we've got an extra
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four point seven pence compared to just
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simple interest and after a year we end
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up with a hundred and forty-four pounds
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if it was simple interest we'd have just
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received 36 pounds 15 and the difference
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of 7 pounds and 52 pence is due to the
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compounding and the interest we've
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received as a percentage is 44 point
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zero 3 percent so here it is as an
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equation we are
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ones are the daily rate and we raised it
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to the power of 365 and that's because
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there are 365 days in a year to convert
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weekly and monthly rates the process is
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almost exactly the same but instead of
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raising to the power of 365 to annualize
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a weekly return we'd raise it to the
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power 52 which is the number of weeks in
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a year to convert a monthly rate we'd
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raise to the power 12 because there are
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12 months in a year let's work through
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the example on a calculator we take 1 we
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add point zero zero one because it's
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point one percent and then you have to
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find this button which is the exponent
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the symbols different on different
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calculators here is X to the power Y on
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some calculators the Y is just a kind of
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square for example on Casio calculators
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so he raised that to the power of 365
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when we get one point four four we
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subtract one and we multiply by 100 to
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convert it into a percentage and we come
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up with 44% as before and then finally
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here's how we do it in a spreadsheet so
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we put our annualization equation into
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cell e3 equals then we put our
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parenthesis 1 plus the daily rate in
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cell b3 and we raise that to the power
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of the number of days in the year which
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is in cell d3 and finally we subtract 1
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and there's our 44.0 3% again if we were
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to do it for weekly the weekly periods
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per year is 52 of the monthly is 12 and
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I just copied the equation down and
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there are our results if you want a bit
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more detail on the maths just take a
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look a pension Kraft calm and our
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Associated blog article what other
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calculations do you find tricky we'd
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love to know tweeters of pension craft
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