Honestly, I didn’t quite understand for a long time why everyone talks about CAGR as such an important indicator. I recently figured it out and now I see it everywhere in portfolio analyses.

Simply put, CAGR (the compound annual growth rate) is a way to find out how quickly your investment has grown year over year. Not just an average growth, but exactly how it would grow if it showed the same result every year. It sounds complicated, but it’s a very convenient way to compare different assets on equal footing.

The formula is simple: take the final value, divide it by the initial value, raise it to the power of (one divided by the number of years), and subtract one. Then multiply by 100 to get a percentage. Honestly, now it’s easier just to punch it into a calculator.

Why do you need this at all? Because CAGR shows the real picture. Imagine your investment jumping up and down, sometimes up, sometimes down. CAGR smooths out all these fluctuations and shows what a steady annual growth would look like. It’s like looking at the average speed of a car over the entire trip, rather than at moments when it sped up or slowed down.

This is especially useful for long-term investing. When you look at several assets and want to understand which one actually performed better over the past few years — CAGR is your best friend. No need to guess, just compare the numbers.

In general, if you take your portfolio seriously, be sure to understand this indicator. It’s a fundamental tool for anyone who wants to understand how their money works.