So I recently started thinking about how to properly evaluate the performance of my investments over time. And I came across the concept of CAGR, which has proven quite useful to me.

It’s the compound annual growth rate. Basically, it’s a number that tells you how much your investment would grow on average each year if it grew at a steady pace. The advantage is that it accounts for the effect of compounding — meaning that profits are reinvested and continue to grow.

Why is this useful? Because it gives you a much clearer picture than just looking at the numbers. It allows you to compare different investments on the same level and see which ones have pulled you upward in the long run.

The formula is not complicated: you take the ending value, divide it by the starting value, raise it to the power of one divided by the number of years, and subtract one. Then multiply by 100, and you have it in percentage.

But it’s important to understand that CAGR isn’t an exact measure of what actually happened each year. It’s more of a representative number — describing what the average annual increase would be if everything grew evenly. In reality, some years see more growth, and others see declines.

That’s exactly why CAGR is such a useful metric. When you want to get an idea of how your investments performed in the past or assess a new opportunity, CAGR provides a simple tool for comparison. Especially for long-term planning, it’s key.