Thursday, September 16, 2010

Compounded Annual Growth Rate

One of the Keyword to wealth building is CAGR (Compounded Annual Growth Rate), i.e. to grow your money as long as possible at a rate as high as possible. Click here for the attached Excel File for the different between CAGR of 5% for 30 years and CAGR of 12% for 30 years, no wonder Compounding is 8th Wonder of the World.

Best investor of the world - Warren Buffet has made a CAGR of 20.3% for 45 years with his company Berkshire Hathaway. What is your target CAGR? For how long?

Example of CAGR
-Peter Lynch - 29% CAGR for 13 years
-Siegel 6.7% CAGR (adjusted for inflation) over 204 years
-Nestle (1999 to 2009) CAGR of 13.46% for 10 years [Invest in Bursa Malaysia]
-BAT (1999 to 2009)
CAGR of 14.76% for 10 years [Invest in Bursa Malaysia]

A simple table as below illustrates that if your return pattern is up and down, for RM100 of investment, your effective CAGR for 5 years will be only about 5.7%


Year ROI $100.00
1 10% $110.00
2 12% $123.20
3 15% $141.68
4 -5% $134.60
5 -2% $131.90

Therefore, Warren Buffet's general rules:-
Rule # 1 is never lose money.
Rule # 2 is never forget Rule # 1.

Click here for article on 10 investing basics from Buffett.