Archives For CAGR

The following is a screen capture of a comment exchange between BG (the same BG who comments on posts here at AFM) and Pamela Yellen:

Yellen Comment

Ms. Yellen doesn’t understand that compound annual growth rate (CAGR) is the same as the average annual return.

The calculation is very simple. Using the VFINX adjusted closing price of $95.51 on 12/19/2005 and the closing price of $188.21 on 12/18/2015, we can calculate the CAGR or average annual return like this:

[(188.21 ÷ 95.51)1 ÷ 10] – 1

[1.970545.1] – 1

1.070184 – 1

.070184 or 7.02%

THIS is the return that investors should be concerned with.

The average return (also known as the arithmetic mean), which is simply adding up all the one-year returns and dividing them by the number of years, would have been a much higher, but misleading, 8.92%.

Be wary of anyone who calls themselves an expert.