Tag: CAGR

  • Gain of 15 percent Yearly When Trading – Is it Possible?

    Gain of 15 percent Yearly When Trading – Is it Possible?

    Gain of 15 percent Yearly When Trading - Is it Possible?
    One of the journalistic truths is that if an article is titled with a question, most often the answer is “no”. But in this case, it is “it depends”.

    By Gorica Gligorijevic

    Making money is the aim of markets, and the gain of 15 percent yearly is often a goal of individual investors. In the colloquial speech “beating the market” means having the return on investment higher than the S&P 500. Since this index was established in 1926, it has posted on average just a bit over 12% gain annually. Which makes striving for 15 percent yearly gains an appealing target to aim for. But the gain of 15 percent yearly is possible. Especially in this world of relatively frequent market corrections and downturns?

    One of the primary characteristics many famous traders are looking for in potential stocks for investment is having an average yearly growth over a number of years of 15 percent or more. The fact that big and successful traders do make investments in stocks says more than anything that such gains are out there waiting to be earned. But there are two schools of thought on this subject matter. One is saying that it is impossible and other, that it is possible to achieve a gain of 15 percent yearly or even more profits per year on the market.

    Why is the gain of 15 percent yearly not possible?

     

    One of the most common arguments among the members of this school of thought is the historic data, particularly for the past 20 years. One of the most cited sources is the J.P.Morgan Asset Management’s data which paints a bleak picture of annualized returns. The absolute bottom of all investment classes in their study is taken by the average investors with just 1.9% returns. The top of the pack is the real estate investment trusts with just 9.9% annualized gains in this period.

    And when you look at those numbers it does look impossible to reach a gain of 15 percent yearly. 

    But among them are also those that point out that this number is by itself a misleading measure. And the math does back them. Because simply put, an average is calculated by adding up all numbers and dividing the sum with how many numbers you have. And it doesn’t reflect how much money you end up with after a certain number of years. 

    For example, if you invest $1,000 and in the first year you have 100% gains but in the second 50% losses, your average return is

    (100-50)/2=25%. 

    But in reality, you have no gains at all. After the first year and 100% increase, you have $2,000. But after losing half of that in the second year, you are back where you have started. With $1,000.

    The influence of CAGR

    Often, they would point out that the compound annual growth rate (CAGR) is a more precise metric, especially for a long term investment. The point is that it captures the compound effect of gains. In other words, average gains show only the average of percentile changes over some period of time. The CAGR shows at which rate your investment actually grew.

    Another argument is that the long term averages, either the arithmetic mean or CAGR, are a misleading measure due to fundamental changes in the markets in recent times. Market corrections happen more often and are caused for different reasons than back in the old days of the 20th century. Thus, over the long-term decreasing the annualized gains even more.

    The third and most common argument is that only the best of investors have ever beaten the market. People like Warren Buffett, Seth Klarman, Benjamin Graham, and so on. Long term value investors, who have gained fame and fortune by extraordinary means. That the average Joe at best can hope to equalize the track record of indices in the long run.

    Why is the gain of 15 percent yearly possible?

    To understand why it might be possible to have a gain of 15 percent yearly when trading you first need to understand that most of the arguments against such possibility are concerning the long-term investments. The buy and hold strategy. And that they are painting the generalities, while precise and correct, fail to present a more granular image of markets.

    Many will point out that the paradigm of the markets has changed. That the real profits are in the “buy and protect” strategy. While it can be costly, smart protection of your profits can yield considerable annual gains.

    Another group of proponents points out the fact that in the 21st-century markets are marked by considerable short-term swings. So that profits are in the swing trading, buying low and selling high while holding stocks just several days or few weeks. This type of trading can bring high and fast profits, but also high and fast losses. Thus, they warn that you should arm yourself with knowledge if you want to achieve a gain of 15 percent yearly.

    Educate yourself 

    Looking for patterns with increase and fall, and thus guessing accurately when to buy and when to sell. Also, collect data about the stocks you wish to invest in. patterns emerge and disappear, and the inherent volatility of the markets is an opportunity for making profits. 

    Studying the historical data of a limited number of stocks can give you insight into a very probable future movement of the prices. You should aim to get in the market at the right time and also exit at the opportune moment. And many will suggest you to not throw your net very wide, not to study too many stocks or look for too many different patterns. To concentrate on quality and not quantity. And always, make sure to have set a stop-loss.

    Try day trading

    The most convincing argument comes from day traders. It can be done very easily, but it comes with a risk. Day trading amounts to entering a trade at a certain predetermined point and exiting at a similarly predetermined point. All after just a few minutes or maybe a couple of hours. 

    Achieving the gain of 15 percent yearly when trading is very easy if you look at it in a certain way. That it is a large number of trades with relatively modest gains on average, in a relatively large period of time. Day trading can involve almost any financial vehicle, but the most popular are stocks, futures, and forex. 

    Quick, relatively small trades compared to multi-million investments you can hear about in the news can bring you a tidy sum in profits on a daily level. And if you are not greedy and use a system which can net you a 50% or more success rate, little by little it adds up.

    A portfolio that can yield a 15% gain per year

    One of the journalistic truths is that if an article is titled with a question, most often the answer is “no”. But in this case, it is “it depends”. If you are looking for a long term investment conventional wisdom is that it will be almost impossible to create a portfolio on your own. And such that could have a gain of 15 percent yearly from trading. Your best option is an investment into ETFs of well-known super-traders and established fund managers with a solid track record. That could, in the long run, net you around 10% per year. 

    But, if you decide for short-term trading there is money to be made in the markets. Markets are by nature volatile, and that presents the risk. But even the steepest market downturns are not straight lines but have a lot of small upticks along the way. And these are the opportunities, which if seized can give you a gain of 15 percent yearly when trading. 

  • CAGR – What Is It And Why You Should Know

    CAGR – What Is It And Why You Should Know

    CAGR Compound Annual Growth Rate
    Just like any other metric, CAGR is helpful but is more valuable as part of a larger analysis. Investors would need to look further.

    When new investors ask what is CAGR they have in mind some complicated formulas and Excel. Well, yes it is but it isn’t so complicated and Traders-Paradise will explain all about CAGR. 

    As first, if you want to build wealth, you have to hold an investment that provides you compounding. That could double your investment. 

    CAGR reveals how much your investment increased over time. It represents the average returns you have earned after some period. That period must be longer than one year. But here we come to the main point of compounding. If you count that only one stock could provide you a steady rate of return every year, forget it. The rate is changing. You will need to add more investments to your portfolio. And when you do that you would like to know how big is the profit you earned for your investments as a whole. Especially if you reinvest. Let’s say you invested in some company and your plan is to reinvest your gains over 5 years. Compound Annual Growth Rate will show you how much return earned you for each year during the holding period. Remember, you have to reinvest your gains every year. 

    CAGR is one of the most accurate methods to calculate returns for your investments, for each separately and for the whole portfolio. Basically, it is the best way to calculate returns for everything that can grow or drop in value.

    You will find that investment advisors like to use this word CAGR when they want to promote their offers. But we would like you to understand what Compound Annual Growth Rate really means and what represents.

    Compound Annual Growth Rate explained 

    CAGR or compound annual growth rate stands for the growth rate that your initial investment will need to grow to an established level over a given period of time. It is similar to compound interest.

    Your investment portfolio will have different rates of return over different times. Let’s say you might have huge gains one year, but the next year wasn’t so good, you made some losses.

    CAGR enables you to calculate returns of your whole portfolio over several years. That period can be 3, 5, 10 years and you can easily figure out how your investments have performed over that given period. That can help you to compare your investments to others.

    CAGR is a mathematical formula

    For example, you invested $10.000 at the beginning of 2018. By the end of that year, your investment grew to $20.000, a 100% return. But the next year you lost 40% and you end up with $12.000.

    So, how to calculate the return for these two years? If you try that by using annual return you will not have an accurate result. It will show you the average annual return of 30% on your investments (100%  gain and 40% loss). Which is a misleading number, because you have ended up with $12.000 and not $16.900.
    The average annual return doesn’t work and you’ll need to calculate the CAGR. So let’s do it.

    We have to divide the ending value of the investment by the beginning value of the investment for a given period, in our case, it is 2 years.

    Raise this result to the power of 1 divided by the number of years we are doing calculations for, which is actually square root in our case.

    And finally, we have to subtract 1 from the last result and multiply the result with 100 to get a percentage.

    ((ending value /beginning value) ^ (1/2) – 1) x 100

    That’s it.

    Compound Annual Growth Rate, in this case, is 9.54%

    Over the 2-years period, your investment grew from $10,000.00 to $12,000.00, and its overall return is 9.54%.

    CAGR actually provides a more precise view of your annual return. Our investment started at $10,000.00 and ended with $12,000.00. In the first year, it grew 100%, in the second we lost 40%. But despite this fluctuation, our investment shows a positive return through its lifetime.

    Why use the Compound Annual Growth Rate calculation?

    It is a helpful tool to compare different investments over a similar investment range. One of the most important advantages of using CAGR is that it, as a difference from the average annualized rate of return, doesn’t let the influence of percentage changes over the investment’s life. 

    Our example shows that the investment produced a 100% return in the first year, boosting the value from $10,.000 to $20.000. When you reinvested (our potential scenario) the whole capital you lose 40% and the value of investment fell. But it generated a positive return over the lifetime of two years.  

    Also, you can use this calculation as help to determine what type of annual returns you maybe need to reach your investing goals. For example, take some imaginary sum into the account and calculate is it good for your goals like retirement or buying a house, for instance.

    Disadvantages

    The disadvantage of CAGR is that it expects growth to be constant and may produce results different from the real situation when it comes to high volatile investment. Investors use this calculation for periods of 3 to 7 years. Over the longer periods, CAGR could lose some sub-trends, simply it can hide them. 

    CAGR doesn’t consider investment risk and volatility. It will always show a smooth yield. So, you may think you have a stable growth rate even when the value of your investment is varying a lot.

    So, remember this, the volatility and investment risk, are essential to examine when making investment decisions. But CAGR will tell you nothing about them. It does not estimate the non-performance associated circumstances in the change of value.

    Bottom line

    CAGR or compound annual growth rate is a helpful tool for measuring the growth over various periods. Imagine it as a jump from your beginning investment value to the ending value while you reinvest all the capital all the time.

    Using it you’re able to evaluate different investment options. But it will not tell you the whole truth. Analyze investment options by comparing their CAGRs from the same periods’, compare the one investment’s annual return to some other investment’s annual return. To evaluate the relative investment risk you will need a different measure.

    CAGR neglects the cash flows or volatility. But in combination with other metrics, it can give you a good view of investments or portfolio.