Investor A made an investment if $100,000 on a stock a year ago and of today, its value stands at $110,000, a paper profit of $10,000.
Similarly, Investor B made an investment of $1,000 on the same stock a month ago and of today, its value stands at $1,010, a paper profit of $10.
The question is whose investment performance is better? Investor A who made a profit of $10,000 or Investor B who made a profit of $10? The answer is Investor B, who has an annualised gain of 12% vs investor A, who has an annualised gain of only 10%.
Yes, the Compounded Annualised Growth Rate (CAGR) should be the yardstick by which we measure our investment portfolio performance, just like what the finance industry does. This is contrary to the majority, who would just tabulate how much profit/loss one makes from stock A in a certain year, stock B in another year etc in absolute value or percentage terms. Using the example above, Investor A would tell others he is standing on a profit of $10,000 or had a 10% Return On Investment (ROI) on that particular stock. His "performance" would definitely sound better than that of investor B, where in fact he is not the better of the two.
The reason you need to measure your portfolio performance by CAGR is so you can compare it easily against the performance of other financial instruments. If your CAGR for the past 10 years is say 5%, you might as well sell everything and invest purely in STI ETF which gives you annualised gains of about 5-8% depending on which time frame you are looking at.
I will elaborate how to track your portfolio's CAGR in the next post, which needs to account for buy sell transactions, dividends, foreign exchange effects if applicable. It's a rather tedious process but absolutely necessary if you want to know how well you do relative to the market.
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