Calculate the true year-over-year growth rate of your investments.
Compound Annual Growth Rate (CAGR) is the most accurate way to measure the performance of an investment over time. It represents the smooth, annualized rate at which an investment grows, assuming profits are reinvested at the end of each year.
If you buy a stock for $100 and sell it for $200 five years later, your "Absolute Return" is 100%. While that sounds great, it doesn't factor in time. A 100% return in 1 year is incredible; a 100% return over 20 years is terrible. CAGR fixes this by telling you exactly what your return was per year.
The mathematical formula for CAGR is: ((Final Value / Initial Value) ^ (1 / Number of Years)) - 1. This formula eliminates the volatility of the market and gives you one single percentage that you can use to compare different investments (like real estate vs. stocks vs. mutual funds).
Historically, the S&P 500 stock market index averages a CAGR of around 8% to 10% per year (adjusted for inflation). Most investors use this benchmark to determine if their individual stock picks or mutual funds are actually performing well.