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Canadian Investing / Canada - Microcaps

URL:  http://boards.fool.com/smooch-cagr-for-me-means-compound-annual-growth-11559650.aspx

Subject:  Re: fees Date:  11/22/1999  6:51 PM
Author:  Jacko2 Number:  702 of 3296

Smooch:

CAGR for me means Compound Annual Growth Rate. Sometimes people will write it as CAAG (Compound Average Annual Growth). If you search around in the Archives for the Fool, you'll eventually stumble on to some great explanations of why portfolio return is preferably expressed in compound growth terms. In short, it's to compare apples to apples: how much an investment grows per year, over time. Compound growth, as compared to what is called "average annual return" or "average return", is the best measurement of how much your wealth is growing (or not!).

For example, take a two-year portfolio, with returns in year 1 of +25% and in the second year of +5%. The "average annual return" is simply (25+5)/2 = 15%; which is the "arithmetic average" (or mean). (The AAR is actually useful, though; in any given year, it is what you can expect the portfolio to return, subject to the "standard deviation" (ie, the range of swing, up and down, that the portfolio will have).)

But using AAR won't give you the correct return: in the example, starting with $100 will give you 100 X 1.15 = $115 in year 1 (end) and then 115 x 1.15 = $132.25. But in fact you only have 100 x 1.25 = $125 by year 1 and then 125 x 1.05 = $131.25 in year 2: a difference of $1. The CAGR is given by a math formula; if you have a spreadsheet, look in the help under things like "present value" or "future value" or "rate". (I'm getting lazy, and don't want to go into the full explanation. It's readily available elsewhere at the Fool.) I use a Texas Instruments BA II calculator to calculate it easily. Here, the CAGR is 14.56%. You'll note it's a little lower than the AAR. We can check it: 100 x. 1.1456 = $114.56 x 1.1456 = $131.24 (you lose a penny to rounding).

When you're looking at someone's report of a "return" from an investment, look carefully to see whether the return is being reported as the AAR or the CAGR. Mutual fund companies like to use AAR sometimes, because it inflates the return; it is always a little higher than the CAGR. But because it is comparable, it is the CAGR that investors are interested in.

2. I think you can find a better deal elsewhere. Norm Rothery's site http://www.ndir.com has a web survey. I use Investorline (Bank of Montreal). It costs $25 for a market order; and $29 for a limit order; both on the web or by automatic telephone; it's $35 to talk to someone. I think TD Waterhouse has a flat $29 fee for web trades; my brother says he's pleased with them. Bank of Nova Scotia I think offers a $22 fee, but their software is cumbersome. But sometimes the extra price can be justified, if the broker offers some extras, such as research. Investorline doesn't offer too much, but it's worked ok for me. However, I don't trade a lot. Different people report different experiences.

Don
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