The content of this article
The average annual growth or return is mostly what is being used when calculating how much an investment has grown per year in percentages. This type of calculation is called Compound Annual Growth Rate, or CAGR for short.
Down below you will find two different types of calculations. The top one calculates CAGR by using the start sum and end sum. The other one calculates by using total return in percentages. Pick the one that suits your purpose best.
Average return/yield per year - calculator
Enter start and end sum and how many years it took/will take for the former to reach the latter.
Enter your total return in percentages and how many years it took/will take to reach the total return.
Calculate annual average return/yield from the total returns (%)
Let’s say you start with USD 100 that you invest in either shares or funds. 10 years later the total sum of your investment is USD 800.
On average, how much has your money increased per year?
Answer: 23.11 %
The money has, in other words, grown by 800 % in 10 years. You may ask: Why shouldn’t the yearly growth be at 80 %? The answer is the interest-on-interest effect. Interest-on-interest means that you not only generate interest on your savings – you also generate interest on the interest that was made previous years.
On the other hand, if you would calculate with a 80 % interest for 10 years, your start amount at USD 100 would reach USD 35,705 by year 10. A significant difference, to put it mildly.
If you would like to use this way of calculating, i.e. with the interest-on-interest effect, you can use our compounding calculator here at Investacle.
How do you calculate compound annual growth rate?
The formula for CAGR is relatively complex, which you can see in the picture. In order to correctly calculate CAGR you follow these steps:
- Divide the end sum with the start sum.
- Take the result from step 1 and take it to the power of 1 divided by amount of years.
- Take the result from step 2 and minus 1.
CAGR is sometimes referred to as equalized rate of return. This is because CAGR measures the yearly growth rate of the investment with the assumption that the rate is constant
If you do not have an end sum to calculate with, but you do know the growth rate (percentage) of your investment, you can calculate the end sum with this calculator. The value you end up with you can then use in the CAGR-calculator above.
What can I benefit from CAGR and interest on interest?
It is a clear advantage to understand interest on interest and CAGR if you want to understand the nature of investment growth. If you, for example, have invested money that has increased by 100% in 12 years, it may sound good. But when you calculate CAGR you will see that it really isn’t that impressive. If you instead hear someone say that they have increased the value of their portfolio by 20% every year for 10 years, you understand what an extreme development that is, even though 20% at face value might not seem like a lot.
How quickly invested capital can be doubled
If we assume 10% return, your investment will double (increase by 100%) after 7,3 years. The chart below shows how quickly your investment doubles based on the yearly growth rate
|Annual return %||Number of years for capital to double|