How to Calculate CAGR

CAGR stands for Compound Annual Growth Rate, and it is a useful metric to measure the performance of an investment over a period of time. CAGR represents the average annual rate of return that an investment would have grown if it had grown at a constant rate every year and the profits were reinvested at the end of each year.

To calculate CAGR, you need three inputs: the beginning value of the investment, the ending value of the investment, and the number of years over which the investment was held. The formula for CAGR is:

CAGR = (Ending Value / Beginning Value)^(1 / Number of Years) - 1

For example, suppose you invested $10,000 in a stock that grew to $19,000 in three years. To find the CAGR of this investment, you would plug in the values into the formula:

CAGR = ($19,000 / $10,000)^(1 / 3) - 1

CAGR = 0.2312 - 1

CAGR = 0.2312 or 23.12%

This means that your investment grew at an average annual rate of 23.12% over the three-year period.

CAGR is a useful way to compare the performance of different investments over different time periods, as it smooths out the volatility and irregularities of returns. However, CAGR also has some limitations. It does not reflect the risk or volatility of the investment, nor does it account for any fees or taxes that may affect the actual returns. It also assumes that all profits are reinvested at the same rate, which may not be realistic in some cases.

Therefore, CAGR should be used with caution and in conjunction with other metrics when evaluating an investment's performance.