Does this ever happen to you? It is problem so common that every 1 out of 5 people experience it (Swear, we didn’t make it up :P)
Jokes aside, it is actually confusing more often than not to understand whether the returns delivered by your investment are good, bad or average. The problem gets acute when your investment has been for a period that is more than one year because you are unaware of how much your investment made year-over-year.
So, what’s the solution?
CAGR or Compounded Annual Growth Rate
While you are obviously aware of acronyms like bff, OMG, ROFL, LMAO and so on, let us quickly decode an absolutely essential acronym that would serve you well for the rest of your life. Yes, CAGR.
To be absolutely precise, CAGR is the best measure when you have to measure the growth of your investment or for that matter, any trend, when the time period is more than one year i.e. multiple periods.
So, how is CAGR calculated? It is a simple formula
[(End value – Start value)/Start value] ^(1/(End date – Start date)) -1 ] x 100
Well, it may look a little complex but to be honest, it is absolutely simple. So simple that, my 10 year old cousin just loves solving for CAGR. Want to see? Let us take numbers from the above meme
Quick tip: The reason I took 3 is because the investment stayed for 3 years (periods).
To clear dino’s confusion therefore, the above investment earned 25.99% per year on a compounding basis which when compared to any instrument is pretty awesome.
See, it is that easy! 2 minutes over and we are happy you got through till the end 🙂