The compound annual growth rate (CAGR) is a measure of the annualized return of an investment over a specific period of time. It represents the average growth rate of an investment each year and takes into account the compounding effect of returns. CAGR is often used to compare the performance of different investments, as it smooths out short-term fluctuations and provides a more accurate picture of long-term growth.
To calculate CAGR, you’ll need to know the beginning value of your investment, the ending value, and the number of years the investment was held. You can then use the following formula to calculate CAGR:
CAGR = (ending value / beginning value)^(1/number of years) – 1
For example, let’s say you invested $10,000 in a stock five years ago, and the value of your investment has grown to $15,000. The CAGR of your investment would be:
CAGR = ($15,000 / $10,000)^(1/5) – 1 = 8.2%
CAGR can be a useful tool for evaluating the performance of an investment, but it’s important to remember that it’s just one measure of return. It doesn’t take into account things like dividends or other income earned on the investment, and it doesn’t reflect the volatility of the investment. It’s also important to note that CAGR is a backward-looking measure, meaning it’s based on historical data and cannot predict future performance.
When using CAGR to evaluate an investment, it’s a good idea to compare it to benchmark indexes or other investments in the same asset class. This can give you a better sense of how the investment is performing relative to its peers. It’s also a good idea to consider other factors, such as the risk profile and the fees associated with the investment, as these can impact overall returns.