Why did my investment show a positive annual return in local currency but a loss once converted?

This typically happens when the local currency weakens against a home currency over the same period, offsetting some or all of the investment’s actual gain once the value is converted back. The investment itself may have performed reasonably well in its own market while still resulting in a loss from a home currency’s perspective, purely because of the currency movement layered on top.

Is a higher annual return always better?

Generally more return is preferable, but a higher annual return often comes with higher volatility or risk, meaning the same investment could just as easily post a larger loss in a different year. Comparing annual return alongside how much the investment’s value has fluctuated historically gives a more complete picture than looking at return alone.

How does annual return differ from an advertised interest rate?

An interest rate, such as on a savings account, is typically a stated, contracted rate the institution pays, known in advance. Annual return is a broader term used for any investment, and reflects the investment’s actual performance over the year, which can vary meaningfully from any single stated rate, particularly for something like a stock or mutual fund whose value changes with the market rather than following a fixed, predetermined rate.

Back to Glossary

What is annual return, and why can currency changes affect it?

Key takeaways
- Annual return is the percentage gain or loss on an investment over a one-year period.
- Total return includes dividends and interest received; price return counts only the price change.
- A nominal return doesn’t account for inflation, while a real return does.
- For an investment held in a foreign currency, exchange rate movement can meaningfully change the return actually experienced once converted back.
- Comparing returns fairly means confirming both figures use the same basis: total or price, nominal or real, and a common currency.

What is the annual return?

Annual return is the percentage gain or loss on an investment over a one-year period, calculated by comparing its value at the start and end of that year, including any income like dividends or interest received along the way. It’s one of the most widely used ways to measure and compare how different investments have performed over the same stretch of time.

How annual return works

To calculate a basic annual return, take the investment’s ending value, add back any income distributed during the year, subtract the starting value, and divide the result by the starting value, expressing the outcome as a percentage. According to Investor.gov⁠(opens in new window), investing doesn’t have a guaranteed rate of return, but many experts consider a 7 to 10 percent annual rate of return a useful long-term historical benchmark for a diversified U.S. stock portfolio, though any individual year can vary considerably above or below that range, sometimes dramatically.

Annual return can be reported in a few different ways depending on the context, and knowing which version is being shown matters for making an accurate comparison. A nominal annual return simply reflects the raw percentage change without adjusting for inflation, while a real annual return subtracts the effect of inflation to show what the money actually gained in purchasing power. For an investment held over multiple years, an annualized return smooths out year-to-year variation into a single average yearly figure, which can look quite different from any specific year’s actual return, since a few very strong or very weak years can pull a multi-year average considerably in either direction.

Total return versus price return

One distinction worth understanding clearly is the difference between total return and price return, since financial media sometimes reports one without making clear which is meant. Price return only measures the change in an asset’s price, ignoring any dividends or interest paid along the way. Total return includes both the price change and any income received, reinvested or not, giving a more complete picture of what an investor actually earned. A stock that pays a meaningful dividend can show a modest price return while still delivering a solid total return once that dividend income is factored in, which is why relying on price return alone can meaningfully understate how an income-paying investment actually performed.

Annual return and international money transfers

For an immigrant with investments in more than one country, currency plays a role in annual return that’s easy to overlook when accustomed to thinking about investment performance in a single currency. An investment can post a solid annual return in its local currency while showing a very different figure once converted into another currency, purely because of how the exchange rate moved over that same year, entirely independent of how the underlying investment itself actually performed. This is why understanding return on investment fundamentals⁠(opens in new window) alongside the currency dimension gives a considerably more complete picture for anyone comparing returns across a domestic account and an account or property held abroad.

This matters practically when deciding how to allocate savings between building an investment portfolio in a current country of residence versus contributing to a family investment, a business, or property back home. The annual return on each option, measured purely in its own local currency, doesn’t tell the full story unless factoring in how that currency has been moving relative to the currency actually spent day to day.

Currency risk note

Exchange rate movement can meaningfully increase or decrease the annual return actually experienced on a foreign-currency investment once it’s converted back into a home currency, entirely separate from how the underlying investment itself performed. A foreign stock or fund that gained 8 percent in its local currency could show a considerably higher or lower return once converted, depending on whether that currency strengthened or weakened against a home currency over the same period. This currency effect is a real, measurable factor in cross-border investing, not a rounding error, and it’s worth keeping in mind whenever comparing a foreign-currency return against a domestic one, since the two aren’t measuring quite the same thing unless both are converted to a common currency first.

How to compare annual returns fairly

Confirm whether a reported figure is price return or total return. Comparing a price-only return against a total return can make one investment look weaker than it actually was.
Check whether the figure is nominal or inflation-adjusted. A high nominal return during a period of high inflation may represent a much smaller real gain in purchasing power.
Convert foreign-currency returns to a common currency before comparing. This isolates the investment’s actual performance from the separate effect of currency movement.
Look at more than a single year where possible. A single year’s return can be an outlier in either direction, and reviewing a longer track record gives a more balanced sense of typical performance.

Common questions about annual return

Why did my investment show a positive annual return in local currency but a loss once converted?

This typically happens when the local currency weakens against a home currency over the same period, offsetting some or all of the investment’s actual gain once the value is converted back. The investment itself may have performed reasonably well in its own market while still resulting in a loss from a home currency’s perspective, purely because of the currency movement layered on top.
Is a higher annual return always better?

Generally more return is preferable, but a higher annual return often comes with higher volatility or risk, meaning the same investment could just as easily post a larger loss in a different year. Comparing annual return alongside how much the investment’s value has fluctuated historically gives a more complete picture than looking at return alone.
How does annual return differ from an advertised interest rate?

An interest rate, such as on a savings account, is typically a stated, contracted rate the institution pays, known in advance. Annual return is a broader term used for any investment, and reflects the investment’s actual performance over the year, which can vary meaningfully from any single stated rate, particularly for something like a stock or mutual fund whose value changes with the market rather than following a fixed, predetermined rate.

In Summary

Annual return gives a standard way to measure and compare how an investment has performed over a year, but for anyone with money invested across more than one country, understanding how currency movement layers on top of the underlying return is essential for an accurate picture. Comparing figures on a common, converted basis, and understanding whether the figure represents price return or total return, protects against drawing the wrong conclusion from a number that looks simple on the surface.

This publication is provided for general information purposes only and is not intended to cover all aspects of the topics discussed herein. This publication is not a substitute for seeking advice from an applicable specialist or professional. The content in this publication does not constitute legal, tax, or other professional advice from Remitly or any of its affiliates and should not be relied upon as such. While we strive to keep our posts up to date and accurate, we cannot represent, warrant, or otherwise guarantee that the content is accurate, complete, or up to date.