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Simple compound growth method |
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Simple compound growth methodCalculating a growth rate by relating terminal value to initial value and assuming a constant percentage annual rate of growth between the two values.Simple compound growth method Similar MatchesCompound Annual Growth RateCompound Annual Growth RateBest defined by example. If you invest $100 today and make 5% in the first year and reinvest ($105) and make 8% in the second year, the compound annual growth rate is 6.489%. The calculation is $100x1.05x1.08=$113.4 which is what you end up with at the end of year two. The average return is [square root(113.4/100) -1]= 0.06489 or 6.489%. Note 1. If we had three compounding periods we would take the cubic root (power of 1/3). Note 2. If we had invested at exactly 6.489 in both periods, we get $100x1.06489x1.06489=$113.4. Note 3. The example is directed to a return - but CAGR could be applied to earnings growth, GDP growth, etc. Compound interestCompound interestThe process by which interest earned on an investment is added back to the amount invested, so increasing the amount of 'principal' on which further interest will be earned in future years.Compounding is sometimes described as the miracle of investing. The fact is that if you reinvest income in your portfolio, you will end up with a much larger amount than if you spend the income as you go along because of the effect of compounding. But to allow compounding to work its magic, you have to start young.Albert Einstein, when asked what he considered to be mankind's greatest invention, replied 'Compound interest!' Compounding frequencyCompounding frequencyThe number of compounding periods in a year. For example, quarterly compounding has a compounding frequency of 4. Compound Annual ReturnCompound Annual ReturnSee: Compound Annual Growth Rate CompoundingCompoundingThe process of accumulating the time value of money forward in time. For example, interest earned in one period earns additional interest during each subsequent time period. Further SuggestionsCompound interestContinuous compounding Compound growth rate Compound option compound annual growth rate Compound interest Realized compound yield Discrete compounding compound reversionary bonus Compounding period Compound tariff |
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