Originally Posted by thefed
How do they calculate the average annual returns on something like this that pays dividends monthly? Do they include those dividends, or only base it on share price?
I now understand that it makes sense to hold something like this in an IRA, specifically a ROTH. But I dont understand how well it is actually doing...because I cant seem to figure out how these annual returns are figured.
They assume the dividends (actually interest and any other distributions) are reinvested each month at the month-end price. They then take the total dollars your initial investment is worth at the end of the measurement period, divide it by the initial investment, and annualize it by finding the N'th root where N is the number of years, and subtracting 1.
You invested $10,000 in the fund 5 years ago and reinvested all distributions, but added no additional money to the fund
Today your investment is worth $14,440.
Your annualized return (compounded) over the period is
(14,440/10,000)^(1/5) - 1 = (1.444)^0.2 -1 = 0.076 = 7.6%