CAGR: Understanding Compound Annual Growth Rate and Its Implications for Investment

Have you ever heard the term CAGR? The Compound Annual Growth Rate (CAGR) is a key measure that shows the average annual growth rate of an investment over a certain period, assuming that growth occurs on a compound basis. In other words, CAGR gives a more accurate picture of your investment performance by accounting for the effects of compound interest.

How Does It Work?

Let's say you invest in XYZ stock with an initial value of IDR 10 million. After 5 years, the value of the investment increases to IDR 20 million. To calculate CAGR, you can use the following formula:

CGAR=EV/BV1/N−1×100

Example: If the initial investment value is IDR 10 million and after 5 years it becomes IDR 20 million, the CAGR is approximately 14.87%. This means your investment grew by an average of 14.87% per year over those 5 years.

Why Is It Important?

CAGR provides a clearer view of investment performance compared to simple annual growth because it considers the compounding effect over time. It helps you:

• Compare the performance between different investments.
• Assess the long-term growth potential more accurately.
• Make more informed and strategic investment decisions.

Investment Tips

Always consider CAGR when evaluating investments to understand the real growth. This will help you make more precise comparisons with other investment options, especially in the long run.