You may estimate your portfolio’s growth rate using any of several methods, depending on what specific information you want. You may calculate an overall growth gain, average yearly growth or a compound annual growth rate that addresses the effects of volatility in certain years. Even accurate numbers, however, can be deceiving. A year-by-year analysis might be in your best interests.
Overall Percentage Gain
The easiest method for determining how much your portfolio has gained over a period of time is to take the amount of increase in value and divide it by your starting number. For example, if you invested $20,000 three years ago and your portfolio is now worth $37,000, divide 17,000 by 20,000 to get 0.85. Your portfolio has grown by 85 percent during the three-year period.
Average Yearly Gain
If you wish to determine the average amount your portfolio gained each year for a certain period, divide your overall percentage gain by the number of years in that period. Extending the previous example, you would divide 0.85 by three and get an average annual growth rate of approximately 28.0 percent per year.
Compound Annual Growth Rate
Looking at your average yearly gain does not give you an accurate picture of your portfolio’s growth per year. For example, if your portfolio's performance was positive over three years but you lost money in one of those years, the yearly average will not reflect the loss. You also won’t see that an increase in the second year was based on a beginning balance that was larger than was the beginning balance for the first year. Looking at your portfolio’s compound annual growth rate allows you to see the percentage increase in your portfolio each year, as if your investments grew at a steady rate. Accountants use the CAGR formula to “smooth out” the volatility of year-to-year performance. Calculating your CAGR requires a bit of advanced math and includes using the nth root of your total growth percentage rate, but websites such as Investopeida.com offer a free CAGR calculator.
Calculating Each Year
For a more accurate estimation of your portfolio’s performance, calculate your annual growth for each year over a specific number of years and look for trends. While you may be pleased with the overall performance or compound annual growth rate of your portfolio over a five-year period, a year-by-year analysis might show that your investments have dramatically slowed in growth during the past two years. This will allow you to look for individual investments or industry sectors that are causing this decline.
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