I've noticed that many people struggle to accurately evaluate the performance of their investments. That's normal, but there is a tool that changes the game: the CAGR, or Compound Annual Growth Rate.

So, what is CAGR in simple terms? It's a financial metric that allows you to precisely calculate how your investment has evolved over a given period. Contrary to what you might think, it's one of the most reliable methods for measuring actual returns, taking into account the effect of compounding. This means your growth is based on itself year after year.

Why is it useful? Because it gives you a clear view. Instead of looking at raw numbers that tell you nothing, CAGR shows you a single rate that represents the average annual growth. It's perfect for comparing two different investments and seeing which one truly performed better over the same period.

The formula is simple: take the final value of your investment, divide it by the initial value, raise the result to the power of (1 divided by the number of years), then subtract 1. Multiply by 100 and there you go, you have your percentage.

In practice, what does it look like? Imagine you invested €1,000 five years ago and it’s now worth €1,500. The CAGR will tell you the constant annual rate at which your money grew, assuming the gains were reinvested each year. It’s a representation, not an exact rate, but it gives you a much better understanding than raw numbers.

This is really the key if you want to do serious investment planning. Instead of getting lost in annual fluctuations, you see the overall trend. And that’s valuable for making long-term decisions.