The Compound Annual Growth Rate (CAGR) is a measure of the mean annual growth rate of an investment over a specified time period longer than one year. It represents one of the most accurate ways to calculate and determine returns for anything that can rise or fall in value over time.
The formula for CAGR is: \[ CAGR = \left( \frac{EV}{BV} \right)^{\frac{1}{n}} - 1 \] where \(EV\) is the ending value, \(BV\) is the beginning value, and \(n\) is the number of years.
The CAGR is a useful tool to compare the growth rates of different investments that have different time periods. It is also useful for comparing the historical performance of investments.
We can incorporate CAGR values for portfolios to help determine the effect of adding in growth stocks to our portfolios. It should be noted though that past performance of a stock or portfolio is no guarantee on future performance. With that in mind using a lower CAGR value for a stock or portfolio is a good idea.
The CAGR form calculates the Compound Annual Growth Rate (CAGR) for a given portfolio over 1, 2, 5, 10 and 20 years.
This is the past growth rate of the portfolio over the given time periods. Reminder that past performance is no guarantee of future performance.
So it is important to take this data as a guide and not as a statement of fact. You can use the information as a guide for numbers to use and adjust in the DRIP Calculator.