Annual return refers to the percentage change in the value of an investment over a one-year period, encompassing both income earned from the investment, such as dividends or interest, and any appreciation or depreciation in the value of the investment itself. This metric is crucial for investors because it allows them to evaluate the performance of their investments over a standardized timeframe, making it easier to compare different assets. For instance, if an investor earns $100 from a $1,000 investment over a year, the annual return would be 10%.

The annual return takes into account all sources of income generated by the investment, which can include interest payments, dividends, or rental income, in addition to the changes in the market value of the investment. For example, a stock might pay dividends quarterly, contributing to the annual return alongside any increase in the stock's price. Similarly, a rental property could provide monthly rental income, which, when combined with any increase in the property's value, contributes to the overall annual return.

It is important to note that the annual return can be positive or negative, reflecting gains or losses over the period. A positive annual return indicates that the investment has increased in value, while a negative return signals a decline. By comparing the annual returns of different investments, investors can assess the relative performance of their portfolios, determine whether their investments are meeting their financial goals, and make informed decisions about where to allocate their resources in the future.