CAGR, or "compound annual growth rate," shows how much an investment is earning over a period of years. By using this, investors can understand the value of their investment to see if they should either keep the investment where it is or move it to another location that may offer a larger percentage of growth.
Divide the ending value of your investment by the beginning value of your investment. For example, if you started with $1,000 and ended with $1,500 after a five-year period, then your ratio would be 1.5.
Raise your ratio to the power of 0.2. In our example, that means taking 1.5 to the 0.2 power gives us 1.08447. The number 0.2 comes from dividing 1 by the number of years we are calculating the CAGR for. In this example, we are calculating it after five years, and 1 divided by 5 equals 0.2.
Subtract that number by 1. In our example, that means we subtract 1 from 1.08447 to get 0.08447. Move the decimal point over two spaces to the right to convert the number to 8.447 percent. This is your CAGR growth over the five-year period of your investment.
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Writer Bio
Rick Paulas is a freelance writer based out of Los Angeles. He has been writing professionally since 2005. He has previously written for "McSweeney's," ESPN.com, "Vice Magazine" and "Radar Magazine," and has worked as an editor for "The Coming," "Duct Tape & Rouge," and "TSB Magazine." Paulas holds a Bachelor of Arts in telecommunications and advertising from Michigan State University.