Question 1

What is CAGR and why is it important?

Accepted Answer

CAGR (Compound Annual Growth Rate) is the annualized rate of return that would take an investment from its beginning value to its ending value over the given time period, assuming profits are reinvested. It is the most accurate way to compare investments held for different durations. Unlike simple average returns, CAGR accounts for the compounding effect and gives you the true annual growth rate of your investment.

Question 2

Should I include dividends in my return calculation?

Accepted Answer

Absolutely. Dividends are a significant component of total stock market returns. Historically, dividends have contributed about 30-40% of the S&P 500's total return. Ignoring dividends underestimates your actual investment performance. This is why total return (price change plus dividends) is always a better measure than price return alone. Reinvested dividends compound over time and can dramatically increase your ending value.

Question 3

What is a good annual return on stocks?

Accepted Answer

The historical average annual return of the S&P 500 is approximately 10% nominally (about 7% after inflation). However, individual year returns vary widely, from -37% (2008) to +31% (2019). A CAGR of 10% or higher on a diversified stock portfolio over 10+ years is considered strong. Individual stocks can produce much higher or lower returns depending on the company's performance.

Question 4

How does this account for fees and taxes?

Accepted Answer

This calculator shows gross returns before fees and taxes. Your actual return will be reduced by trading commissions (though many brokers now offer free trades), fund expense ratios (typically 0.03-1.0% annually), and capital gains taxes (0-20% for long-term gains). To estimate your after-tax return, subtract the applicable tax rate from your gains. For a more accurate picture, subtract any fees paid from your total return.

Question 5

What is the difference between total return and annualized return?

Accepted Answer

Total return is the cumulative gain or loss over the entire holding period, expressed as a dollar amount or percentage. Annualized return (CAGR) converts that total return into an equivalent annual rate. For example, a 50% total return over 5 years equals a CAGR of about 8.4% per year. Annualized return is better for comparing investments because it normalizes for different holding periods. Total return shows your actual profit.

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