How to Calculate the Expected Annual Rate of Growth in the Investment

by C. Taylor

It is commonly said that the greatest predictor of the future is the past, and that holds true for investments as well. If you wish to calculate the expected annual rate of growth, you can extrapolate that information from past performance. Naturally, no estimate can be 100 percent accurate, nor predict unforeseen circumstances, but in most cases, it's the best information you have available. Therefore, you can use your short-term growth rate and calculate its annual equivalent.

1. Divide the current value of your investment by the original expense. As an example, if you purchased one share of stock for \$50, and it was priced at \$55 100 days later, then you would divide \$55 by \$50 to calculate a growth factor of 1.10.

2. Divide 365 by the number of days in the investment. In the example, if you owned the stock for 100 days, you would divide 365 by 100 to get 3.65.

3. Raise the growth factor by this newly calculated value. In the example, you would raise 1.1 to the power of 3.65. On a business or scientific calculator, you would you enter "1.1" press the "X^y" key and enter "3.65." This gives you 1.416.

4. Subtract 1 from this figure to estimate the annual rate of growth. In the example, you would have 0.416, or 41.6 percent.