CAGR III

LP's CAGR II

A Carpenter and his Measuring Tape

A carpenter uses his measuring tape to measure twice before he cuts his wood; but a private tutor doesn't really need to measure and has no wood to cut and he will think that why does anybody in the world need a measuring tape?

CAGR is like a measuring tape to an investor.

Why you need to measure? Measure, measure, measure - Part 2

To ease measuring: Two Bank Accounts? No, You may need Four! - Part 2

LP's little problem with CAGR

"I think cagr can be used to find out one's investing returns per year, compounded annually. However, it doesn't work if you inject or withdraw cash, affecting the initial value. I have such problems because I never did fix a investing capital and see how much it'll grow from there. I continually invest more over the years."


Injecting cash
 
CAGR isn't the actual return in reality. It's an imaginary number that describes the rate at which an investment would have grown if it grew at a steady rate.
 
Simply use "Total Invested Capital" including those cash you have injected yesterday -  anything seriously wrong with it? Do you really need to boost your ego? When investing in the stock market, it is wise to hang your ego at the door.
 
Withdrawing cash
 
When withdrawing cash, you simply treat it capital reduction. When you reduce some capital in your portfolio, you will have to similarly reduce the pro-rated Realized Profits to minimize the positive distortion in CAGR (i.e to avoid better than actual)
 
For example,
 
This is what I did when I withdrew some cash in 2009 to fund my two kids Uni expenses.
 
Total Invested Capital = $100,000; Realized Profit is $50,000
 
Capital + Realized Profit = $100,000 + $50,000 = $150,000
 
I withdrew $10,000 cash from the Portfolio.
 
$10,000/$150,000 = 6.7%
 
So I deducted 6.7% off the Capital and 6.7% off the Realized Profit.
 
After the cash withdrawal:
 
Total Invested Capital = $93,333
Realized Profit = $46,667