Which annual investment return would you prefer to earn: 9% or 10%?
All things being equal, of course, anyone would rather earn 10% rather than 9%. But when it comes to calculating annualized investment returns, all things are not equal, and differences between calculation methods can produce striking dissimilarities over time. In this article, we'll show you how annualized returns can be calculated and how these calculations can skew investors' perceptions of their investment returns.
A Look at Economic Reality
Just by noting that there are dissimilarities among methods of calculating annualized returns, we raise an important question: Which option best reflects reality? By reality, we mean economic reality. In other words, which method will show how much extra cash an investor will have in his or her pocket at the end of the period?
Source : Investopedia