How to Calculate the Growth Rate of an Investment

The growth rate of an investment shows how much its value increases over time, helping to evaluate performance. A common way to calculate this is by using the compound annual growth rate (CAGR), which averages annual growth with compounding. This is useful for long-term investments, and knowing this rate could help you determine whether an investment fits into your portfolio. A financial advisor can also help you analyze investments and rebalance your portfolio when needed.

Understanding the Growth Rate of an Investment

The growth rate of an investment measures how much its value has increased over a specific period of time, helping you evaluate the performance of an asset. One method of determining an investment’s growth rate, the compound annual growth rate (CAGR), smooths out short-term fluctuations. This metric provides a consistent annual growth rate representing how the investment has grown from its initial value to its current value over time.

Investors often rely on growth rates to compare different investments and predict future returns. A high growth rate may indicate strong performance, while a lower or negative rate might signal a need for re-evaluation.

While the CAGR of an investment provides useful information, this metric has limitations, too. By overlooking fluctuations that may happen during a period of time, the CAGR may ignore significant volatility in a market. Plus, a larger growth rate isn’t always better. The CAGR should be considered within the context of the investment’s industry and asset class as well as the investor’s goals.

How to Calculate the Growth Rate of an Investment

Investors often calculate growth rates to track how their investments are doing relative to benchmarks or their financial goals. The CAGR represents an investment’s average annual growth rate over a period of time, accounting for compounding. You can calculate an investment’s CAGR with the following formula, as long as you know its ending value, beginning value and the time period (in years):

CAGR = (Ending Value / Beginning Value)^(1/n) – 1

In this formula, “n” is the number of years.

For example, if an investment grows from $10,000 to $15,000 over five years, the CAGR would represent the steady annual growth rate as follows:

CAGR = ($15,000 / $10,000)^(⅕) – 1

CAGR = 0.845, or 8.45%

How to Use Growth Rates For Investing Purposes

Growth rates, particularly the CAGR, provide a clear picture of how an investment has performed over time. By calculating this rate, you can compare different assets and determine which investments are providing the best returns over time. This insight helps investors prioritize high-performing investments and reconsider those that are underperforming.

Growth rates also allow you to evaluate the overall trajectory of your investment portfolio to ensure it aligns with your financial goals, such as saving for retirement or purchasing a home. Additionally, growth rates can guide decisions about diversification. For example, pairing high-growth stocks with more stable, slower-growth investments can help you brace for market volatility.

Bottom Line

Calculating the growth rate of an investment can help you assess its performance over time. By using methods like the compound annual growth rate (CAGR), you can gain a clearer understanding of how much your investments are growing on an annual basis, smoothing out short-term market fluctuations.

Investment Planning Tips

• Whether you’re evaluating past returns or planning future investments, a financial advisor could help you calculate the growth rate of your investments and manage your portfolio to set and reach financial goals. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

• If you want to know how much your investments could grow over time, SmartAsset’s investment calculator could help you get an estimate.

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