How to calculate investment growth rates

The growth rate of an investment shows how much its value increases over time, which helps measure performance. A common method of calculation is to use the compound annual growth rate (CAGR), which averages annual growth after compounding. This is useful for long-term investing, and knowing this rate can help you determine whether an investment fits into your portfolio. A financial advisor can also help you analyze investments and rebalance your portfolio if necessary.

Understanding investment growth rates

The growth rate of an investment shows how much its value has increased over a given period of time, which helps you evaluate the asset’s performance. One method for determining investment growth rates, the compound annual growth rate (CAGR), smooths out short-term fluctuations. This metric provides a constant annual growth rate that shows how an investment has grown from its original cost to its current value over time.

Investors often rely on growth rates to compare different investments and predict future returns. High growth rates may indicate good results, while lower or negative rates may signal the need for re-evaluation.

While the average annual rate of investment provides useful information, it also has limitations. By not paying attention to fluctuations that may occur over a period of time, CAGR can ignore significant volatility in the market. Moreover, higher growth rates are not always better. CAGR should be considered in the context of the investment industry and asset class and the investor’s objectives.

How to calculate investment growth rates

Investors often calculate growth rates to track how their investments are performing relative to benchmarks or financial goals. CAGR is the average annual growth rate of an investment over a given period of time, taking into account compounding. You can calculate the compound annual growth rate of an investment using the following formula if you know its final value, initial value, and time period (in years):

CAGR = (final cost / initial cost)^(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 investment purposes

Growth rates, especially the compound annual growth rate, 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 provide 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 make sure it’s aligned with your financial goals, such as saving for retirement or buying a home. In addition, growth rates may drive diversification decisions. For example, pairing high-growth stocks with more stable, slow-growing investments can help you prepare for market volatility.

Bottom line

Calculating the growth rate of an investment can help you evaluate its performance over time. Using methods like compound annual growth rate (CAGR), you can get a clearer picture of how much your investment is growing year over year, smoothing out short-term market fluctuations.

Investment Planning Tips

• Whether you’re assessing past returns or planning future investments, a financial advisor can help you calculate the growth rate of your investments and manage your portfolio to set and achieve financial goals. Finding a financial advisor doesn’t have to be difficult. SmartAsset’s free tool will match you with up to three vetted financial advisors who serve your area, and you can take a free introductory call with your eligible advisor to decide which one you think is right for you. If you’re ready to find an advisor to help you achieve your financial goals, start now.

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

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