What is CAGR? How to make great investment choices
While some people are happy rolling the dice and gambling on monthly, or even daily returns, you know that gambling hasn’t anything to do with a real investment strategy. Fund managers are monitoring markets, but a good strategy should mean that they don’t have to restructure portfolios constantly. Nor should you.
Investments grow in two ways. The price per share can rise, but if you aren’t getting dividends, the only way to realize that value is to sell. Dividends,on the other hand, are paid out at preset intervals, and if you reinvest them, your investment grows, and with that, the next dividend payout is bigger too. It’s a lot like normal compound interest, but with a few twists to the tale.
What is CAGR?
CAGR, or compound annual growth rate, measures the annual growth rate of an investment over periods longer than a year. You can calculate your annual growth rate quite easily using an online tool. And if you have a few years’ data to use, CAGR becomes one of the best ways to check the returns you can realize from your assets, including your investment portfolio. That’s because it takes fluctuations over time into account on the assumption that you didn’t cash in.
For example, if an investment generated high returns in its first year, but then corrected to a lower rate of return, CAGR smooths out the results. It shows a steady trend line instead of one that goes up and down till you can’t really make sense of it. And once trends start to remain constant, you can make better predictions and so evaluate your portfolio better.
True investment is always long-term
The bitcoin bubble served to prove the point: true investment is always long-term. Back in its heyday, crypto punters promised an opportunity to win big fast while being careful not to mention the possibility of losing even bigger and just as speedily. It was, and remains, an “investment” that’s more like a gamble because there is absolutely no tangible value to back it.
Serious investment means choosing something with sustainable value and steady, though possibly unexciting, growth. Over time, the compound annual growth rate (CAGR) starts to work its magic and value starts to snowball.
When share values dip, you hold on tight. Unless something has drastically changed the market, they’ll recover. You’re also hedging your bets by diversifying across asset classes to get the best of each one when it’s performing well. That, in turn offsets your losses when certain asset classes underperform. What you get is a steady growth curve. It may sound unexciting, but it remains the best way to build wealth.
CAGR helps you to make the right choices
Measuring the value of your investments from day to day or even month to month is sure to give you a headache and turn you into a nervous investor. Tracking the CAGR is a much better measurement, and although no investment with fluctuating value is without risk, taking a big picture view could save you from investment mistakes that are common to those with a shorter-term perspective.