What Is The Compound Annual Growth Rate, The Different Compound Annual Growth Rate Tiers That An Investment Portfolio Can Have, And How Having A High Compound Annual Growth Rate In An Investment Portfolio Can Help People To Generate Extreme Wealth

This essay sheds light on what is the compound annual growth rate, demystifies the different compound annual growth rate tiers that an investment portfolio can have, and expounds upon how having a high compound annual growth rate in an investment portfolio can help people to generate extreme wealth. Succinctly stated, the compound annual growth rate is deemed to be “the mean annual growth rate of an investment over a period longer than one year”. In other words, the compound annual growth rate is able to demystify “a smoothed rate of return” that reflects the rate of return that “an investment yields on an annually compounded basis”. The compound annual growth rate is in the form of a pro forma number. The compound annual growth rate formula has tremendous utility. The compound annual growth rate formula can be leveraged by investors to discover the earnings growth rate of companies “on an annually compounded basis”. Discovering the earnings growth rate of companies “on an annually compounded basis” can allow investors to ascertain how disparate companies “earnings perform over time on an annually compounded basis”. By ascertaining how different companies “earnings perform over time on an annually compounded basis”, investors are at a higher probability to implement informed investment decisions. The compound annual growth rate formula lacks the innate limitations of the arithmetic average return. The arithmetic average return does not take into account the compounding effect of an investment. The arithmetic average return also does not factor in the reinvestment of dividends in an investment. The reinvestment of dividends in an investment can affect the return on an investment over time. As a corollary of the arithmetic average return not taking into account the compounding effect of an investment, “it can overstate the actual average return” of an investment. The arithmetic average return is also less accurate than the geometric mean for ascertaining the average return of an investment over ample annual consecutive periods of time. The geometric mean can be leveraged by investors to ascertain the average return of an investment over ample annual consecutive periods of time. The compound annual growth rate formula can be leveraged by investors to discover “the mean annual growth rate of an equity on an annually compounded basis”.