Your main goal is to achieve financial stability and grow your investments.
By now, you have been working against a budget, you have been progressively saving and reinvesting. All your efforts and discipline are paying off.
Understanding the current economic conditions and staying informed of federal policies, interest rates, market cycles will put you in the driver seat. Adjustments to your contributions, asset allocations will be needed; I suggest on a quarterly basis.One thing to keep in mind is continuous and steady growth. Target is anything over 8% yearly growth.
Let’s talk about the compound annual growth rate; which is the year-over-year growth rate of an investment over a specified period of time. CAGR describes the rate at which an investment would have grown if it grew at a steady rate. You can think of CAGR as a way to smooth out the returns.
Suppose you invested $10,000 in a portfolio on Jan 1, 2010. Let’s say by Jan 1, 2011, your portfolio had grown to $13,000, then $14,000 by 2012, and finally ended up at $20,000 by 2013.
Your CAGR would be the ratio of your ending value to beginning value ($20,000 / $10,000 = 2) raised to the power of 1/3 (since 1/# of years = 1/3), then subtracting 1 from the resulting number:
2 raised to 1/3 power = 1.2596. (This could be written as 2^0.3333).
1.2596 – 1 = 0.2596
Another way of writing 0.2596 is 25.96%.
Thus, your CAGR for your three-year investment is equal to 25.96%, representing the smoothed annualized gain you earned over your investment time horizon.