The Compound Annual Growth Rate or CAGR
Posted on Aug 29, 2008 under Financial Literacy, Investing | 7 CommentsOne of the calculations that you’ll hear thrown around time and time again is the compound annual growth rate. It’s a more accurate measure of past investment performance than just a simple average of the different years investment returns. Knowing what the average return of some investment is doesn’t give you any insight into what you might actually expect to have as a result of some initial investment.
To illustrate this, consider the example of two consecutive years where you earn 50% the first year and then lose 33% the next. If you average these returns, you end up with a 8.5% return on your investment, which doesn’t sound that bad. But if you actually run the numbers on some initial investment, you can see that the actual two year return was 0%.
So here’s how you calculate the Compound Annual Growth Rate (CAGR):
CAGR = [Ending Balance/Beginning Balance]^(1/Time Period, i.e. number of years)
It’s a relatively simple calculation to make, and it’s important because you can then equally compare the returns from different investments. I will caution you though, that just because you know the CAGR of some investment in the past, it cannot accurately predict the future returns of the investment.
Subscribe to Fiscal Musings | Digg This! | Stumble it!
by Justbiz, on January 14 2009 @ 12:37 am
Just know during my meeting in the slides they mention CAGR. Thanks for info on it. Much clearer to understand.
by lack of motivation, on May 19 2011 @ 3:37 pm
Massive post. I have 1 kind of beside the point question though: Did you create the website design yourself or did you get it somewhere? I have been searching for a respectable website style for some time now and I could use some recommendations… Everything is appreciated! Thanks a heap and keep up the work on your site.
by plotki o gwiazdach, on May 30 2011 @ 6:17 am
Thanks for your strategies. One thing really noticed is that often banks and also financial institutions know the dimensions and spending behavior of consumers while also understand that many people max out their cards around the holidays. They correctly take advantage of that fact and start flooding your inbox as well as snail-mail box together with hundreds of no interest APR credit cards offers shortly after the holiday season comes to an end. Knowing that in case you are like 98% of the American community, you’ll soar at the possiblity to consolidate credit debt and shift balances to 0 interest rates credit cards.
by Lelah Hurrigan, on June 21 2011 @ 5:17 am
Hi the info on this site is just incredible it keeps us coming back time and time again ,personallythis site has helped me through some very troubled funerals so i couldnt love it any more i have done my best to promote this blog as i feel that others need to see this thng ,thankyou for all the time you take in making this fabulous resource ! ok,thankyou
by wiseman, on June 26 2011 @ 11:48 am
A powerful share, I just given this onto a colleague who was doing a bit evaluation on this. And he in fact purchased me breakfast because I discovered it for him.. smile. So let me reword that: Thnx for the deal with! However yeah Thnkx for spending the time to debate this, I feel strongly about it and love studying more on this topic. If doable, as you become expertise, would you mind updating your blog with more particulars? It’s highly helpful for me. Large thumb up for this weblog publish!
by Alfredo Wydra, on August 12 2011 @ 3:15 am
An fascinating discussion is price comment. I feel that you need to write extra on this subject, it might not be a taboo topic however typically individuals are not enough to speak on such topics. To the next. Cheers
by Beat the Bookstore, on November 4 2011 @ 6:48 am
Looking around……
[...]one of our visitors recently recommended the following website[...]…