CAGR

CAGR stands for Compound Anual Growth Rate and it shows what return we can expect from certain investments. All we need to know to calculate it is the starting capital, ending capital, and the length of the period in days. The CAGR calculator is using a very simple formula :

EB : Ending Ballance, SB : Starting Ballance

A typical case for using the CAGR calculator is when we cannot directly detect the income for one year or we do not have a full year or we have a longer period - for example a year and a half. Then we can take the period we have and calculate what the annual income is using the calculator. Of course, we must remember that when we are dealing with statistical data, the larger the period the more accurate the calculated result will be.

Let's suppose that we have an investment of 1 000 USD, which after 20 years return to 6 727.50 USD. The simple growth rate will return 28.63% per year and Compound Annual Growth Rate will be 10%. You can see that there is a huge difference which could have a vast influence on your investment decisions. You could ask yourself, which of these two methods is better and why. As you don’t get regular returns during the period (dividends or coupons) and get the whole amount at the final date, the proper way to measure your return is Compound Annual Growth Rate. CAGR advantages and disadvantages. See the main advantages of Compound Annual Growth Rate below: 1. CAGR is the most accurate method for measurement of investment return; 2. It allows you to compare and chose the best return when you compare investments with different duration (different investment periods). 3. The method gives the possibility to compare the return of investment with a risk-free return and see what is the risk premium for a certain investment.

As with every method, Compound Annual Growth rates also have disadvantages. 1. CAGR doesn’t measure the volatility of the investment before the final date of investment. This means that if for example we have 3 years of investment and decide to exit from it at the end of the first year, CAGR can’t give you the expectation what will be the value of the investment at that movement. 2. Compound Annual Growth Rate doesn’t measure the risk that the investment is carrying. In other words, you can’t measure the probability of happening the expected Final balance. 3. CAGR doesn’t count adding additional funds to your investment or receive regular payment into the period after starting date and before final date. 4. Compound Annual Growth Rate doesn’t measure inequality of the return during the period. For example, in some periods even with a negative return during the whole period, CAGR will return as the average return for the whole period.