CAGR is a useful measure of investment growth over several periods of time, especially if the value of your investment fluctuated greatly during the period under review.
to calculate the CAGR, enter the initial value, the final value, and the number of periods during which the investment has grown.
CAGR calculation Formula
CAGR, or total annual growth rate, is the average rate at which investments grow over time, assuming that they are reinvested annually (periodically), i.e. given a compound interest rate. CAGR has nothing to do with the value of investments in the intervening years, as it depends only on the value in the first year and the last year of investment ownership.
CAGR = (EV / BV) 1/n - 1
- BV - Initial value, BV (starting value)
- EV - End value, EV (ending value)
- n - number of periods
If your investment has grown from 100,000 $ to 250,000 $ over the past five years, the total annual growth rate of your investment was 20.11% per year. The CAGR calculator can also be used to determine the growth rate that you will need in the future to achieve the investment goals set today. For example, if you have $ 1,000 today, and in five years you want your investment to be $ 2,500, you will need to find ways to invest that are expected to yield 20.11% per year.
Where the CAGR calculator is used
the average Annual growth rate is applied in different areas of personal Finance. It is often used to calculate the average growth of individual investments over a period. CAGR can be used when comparing the return on equity with bonds or deposits. In addition, it can be used to compare the performance of two companies and predict their future growth based on their historical data.
CAGR does not account for volatility. It only calculates the average return percentage, so CAGR values should never be considered as the only tool to estimate return on investment.
Why CAGR is so important
Although average annual return is generally accepted for mutual funds, CAGR is still the best measure of return on investment over time.
For example, we have made a hypothetical investment of 1000 $ in some Fund or in something (where it does not matter). Two years passed. At the end of the first year, the value of the portfolio fell from 1000 to 750 $, i.e. the yield is -25% [(750-1000) / 1000]. And then, by the end of the second year, the value of the portfolio increased by + 33% [(1000 - 750) / 750].
Averaging the results for the 1st and 2nd year for two years gives us the average yield 4% [(-25 + 33) / 2], but it doesn't exactly reflect what really happened. We started with 1000 $ and also finished at 1000 $, which means our yield is 0%.
I.e. once more. In this example, the average annual yield: 4%, and CAGR is 0%, which is certainly correct.