A Personal Finance Blog for Malaysian: Compounded Annual Growth Rate

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.