How to Calculate Long-Term Investments
If you are analyzing your returns in the long run, you may wish to use a measure that eliminates short-term movements such as volatility or business cycle fluctuations. One such measure that examines long-run return is that of the compound annual growth rate, often abbreviated to CAGR. The CAGR is a simple calculation that is preferred to other return measures, such as the IRR, as it focuses more on the final value of the investment relative to the initial cost.
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Instructions
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Record the data needed for your calculation. You will need the age of your investment, in terms of years, plus the final value of the investments and the starting value of the investment.
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Divide the final value of the investment by the starting value of the investment. For example, if you invested $1,000 into a certain portfolio and after 10 years this portfolio is worth $1,500, dividing $1,500 by $1,000 gives 1.5.
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Raise your result to one divided by the age of your investment. So, if your portfolio is 10 years old, dividing 1 by 10 gives 0.1. Raising 1.5 to the power of 0.1 gives 1.0414, rounded to the nearest ten thousandth of a percent.
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Subtract one and multiply by 100. Using the same example, this would give a result of 4.14 percent. This represents the compound annual growth rate of the investment, or the amount the investment increased per year after taking account any short-term fluctuations within the 10-year period.
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