Compound Growth and How It Is Calculated

September 7, 20226 min read
Compound Growth and How It Is Calculated
Share on facebookShare on TwitterShare on Linkedin

Key Takeaways

  • Compound annual growth rate (CAGR) is a useful metric by which to gauge the average return of assets that rise and fall in value over time. 
  • CAGR can also be used to compare the performance of a group of similar assets.
  • However, CAGR should not be used to determine investment risk. 


The true power of investing is derived from the amount of time an investment is given to grow. Yes, the size of the capital investment also plays a role. However, growth is achieved when interest earns interest. This compounding effect can snowball over time, causing the principal investment and the interest gained from that investment to grow simultaneously. 

This brings us to the idea of compound growth and how it is calculated.

What is Compound Growth?

In the simplest terms, compound growth is defined as an investment’s average growth rate over a specific period. Essentially, it is the returns earned on the original investment amount, added to subsequent earnings on the combined amounts as earnings are reinvested. This can create many multiples of the original investment over the long term. 

For example, if an investor takes a $2,000 position in an opportunity at an annual growth rate of 6%. They would have $2,120 at the end of the first year. Reinvesting that return, they would earn 6% on the $2,120 the following year, giving them a total of $2,247.20. Assuming a consistent annual 6% rate of growth, the investment would be returning over $650 annually over a 30-year period.

This is the power of compounding

However, few things grow continuously in the real world. There are periods of intense growth and moderate growth, as well as some with no growth at all. 

The reality is that true compound growth is rare. However, measuring it can still be important to investors. Calculating the average growth rate of an investment over a certain period can provide investors with a metric by which they can compare various investing opportunities. This can help them determine the potential of a given opportunity.

Compound Annual Growth Rate

The compounded annual growth rate (CAGR) is considered one of the most accurate means of calculating the returns of an investment that’s likely to fluctuate in value over time. CAGR is a good way to gain insights into how different investments have performed over a given period, or against a specific benchmark. 

Within this, however, it is important to note that the CAGR represents a “smoothed” rate of return. Rather than a reckoning of the growth an investment achieved in any specific year, the CAGR reflects the average growth rate of an investment over an extended period. 

Calculating a CAGR

A CAGR calculation is achieved by first dividing the value of an investment at the end of a prescribed period by its value at the start of that interval. The quotient of that calculation is then raised to an exponent of one, divided by the number of years under consideration. From the result of that calculation, one is subtracted, the result of which is then multiplied by 100 to determine the percentage. 

The formula is as follows:

CAGR = (EV/BV)1/n − 1×100

EV=Ending value

BV=Beginning value

n=Number of years​

To illustrate this, imagine a scenario in which $10,000 was invested in a portfolio over a three-year period. The investment gained 30% the first year, which was reinvested, making the principal amount $13,000 going into the second year. The investment then gained 7.69% the second year, which when reinvested, making the principal amount $14,000 going into the third year. That amount realized a gain of 35.71% the third year, bringing the total to $19,000.

While this scenario illustrates a great deal of volatility over that three-year period, the average growth rate was 23.86%

Using the formula above, this can be calculated as follows:

CAGR = ($19,000/$10,000)1/3 − 1×100 = 23.86%

CAGR Uses

As mentioned above, CAGR can be useful for investors as a metric for comparing investment opportunities. While market volatility can mask the true performance potential of an asset, comparing its CAGR to other similar ones can result in a reasonable evaluation. 

CAGR can also be used to help an investor determine the average rate of return they’ll need to achieve a particular goal. Say for example an investor knows that they will need $100,000 in 18 years and they have $30,000 to invest. 

Needed Rate of Return = ($50,000/$15,000)1/18 − 1×100 = 6.90%

Based upon that calculation, they would need to find an investment returning 6.9% or better to achieve their goal. 

CAGR Limitations

Any discussion of CAGR must come back to the fact that it represents a smoothed rate of growth. In other words, the peaks and troughs of an investment’s performance curve are leveled out when calculating a CAGR. Thus, the calculation will not provide a true reflection of the volatility an investment experiences on its way to the calculated CAGR. 

Further, the CAGR does not take into consideration additions and withdrawals from a portfolio over time. Adding to the principal amount over the period measured will artificially inflate the CAGR. The CAGR would be calculated based on the beginning and ending values, so the interim deposits would not be taken into consideration. Instead, they’d be seen as growth. 

Similarly, withdrawals could lower the CAGR artificially.

It is also important to note that investors should be careful to understand that past performance is not always an indicator of future returns. As an example, a strong CAGR calculated over the three years leading up to the quarantines imposed by the COVID-19 pandemic would in no way be predictive of the market drops that occurred during the quarantine periods, or of the post-quarantine inflationary period.

A CAGR quote can also be used to mask periods of poor performance. Say for example an investment fund has a value of $200,000 in year one, $142,000 in year two, $88,000 in year three, $162,000 in year four and $252,000 in year five. The 42% CAGR of the last three years of that scenario would look really good. However, the 4.73% CAGR over the entire five-year period is much less impressive.

CAGR, Volatility, Portfolio Diversification and Alternative Investments

Going back to a previous point, calculating a compounded annual growth rate can smooth out periods of volatility. However, investors cannot afford to ignore volatility. 

Thus, portfolio diversification is strong advice. 

Varying the mix of asset classes held within a portfolio can help accomplish this. For example, fixed-price assets such as bonds, certificates of deposit and treasury notes usually respond to market volatility more favorably than publicly traded equities. This makes them useful when it comes to defending against potential instability. Alternative investments can also be potentially useful tools for portfolio diversification

Traditional portfolio asset allocation envisages a 60% public stock and 40% fixed income allocation. However, a more balanced 60/20/20 or 50/30/20 split, incorporating alternative assets, may make a portfolio less sensitive to public market short-term swings. 

Real estate, private equity, venture capital, digital assets, and collectibles are among asset classes deemed “alternative investments.” Broadly speaking, such investments tend to be less connected to public equity, and thus offer potential for diversification. 

These asset classes were traditionally accessible only to an exclusive base of wealthy individuals and institutional investors buying in at very high minimums — often between $500,000 and $1 million.  Yieldstreet opens a number of investment strategies that were formerly available only to institutional investors and the top one percent of earners to all investors. 

The company offers help in capitalizing on areas such as real estate, legal finance, art finance and structured notes — as well as a wide range of other unique alternative investments. Moreover, investors can get started with a relatively small amount of capital. Yieldstreet has opportunities across a broad range of asset classes, offering a variety of yields and durations, with minimum investments as low as $10000. Learn more about the ways Yieldstreet can help diversify and grow portfolios.

In Summary

Compound annual growth rate is a useful metric when it comes to measuring the performance of an asset over a given period of time. However, it is not an accurate indicator of investment risk. In other words, the CAGR is but one of the tools an investor should apply to the evaluation of an investment opportunity. This rate should be also considered for retirement planning, for example.

We believe our 10 alternative asset classes, track record across 470+ investments, third party reviews, and history of innovation makes Yieldstreet “The leading platform for private market investing,” as compared to other private market investment platforms.

1 Past performance is no guarantee of future results. Any historical returns, expected returns, or probability projections may not reflect actual future performance. All securities involve risk and may result in significant losses.

3 "Annual interest," "Annualized Return" or "Target Returns" represents a projected annual target rate of interest or annualized target return, and not returns or interest actually obtained by fund investors. “Term" represents the estimated term of the investment; the term of the fund is generally at the discretion of the fund’s manager, and may exceed the estimated term by a significant amount of time. Unless otherwise specified on the fund's offering page, target interest or returns are based on an analysis performed by Yieldstreet of the potential inflows and outflows related to the transactions in which the strategy or fund has engaged and/or is anticipated to engage in over the estimated term of the fund. There is no guarantee that targeted interest or returns will be realized or achieved or that an investment will be successful. Actual performance may deviate from these expectations materially, including due to market or economic factors, portfolio management decisions, modelling error, or other reasons.

4 Reflects the annualized distribution rate that is calculated by taking the most recent quarterly distribution approved by the Fund's Board of Directors and dividing it by prior quarter-end NAV and annualizing it. The Fund’s distribution may exceed its earnings. Therefore, a portion of the Fund’s distribution may be a return of the money you originally invested and represent a return of capital to you for tax purposes.

5 Represents the sum of the interest accrued in the statement period plus the interest paid in the statement period.

6 The internal rate of return ("IRR") represents an average net realized IRR with respect to all matured investments, excluding our Short Term Notes program, weighted by the investment size of each individual investment, made by private investment vehicles managed by YieldStreet Management, LLC from July 1, 2015 through and including July 18th, 2022, after deduction of management fees and all other expenses charged to investments.

7 Investors should carefully consider the investment objectives, risks, charges and expenses of the Yieldstreet Alternative Income Fund before investing. The prospectus for the Yieldstreet Alternative Income Fund contains this and other information about the Fund and can be obtained by emailing [email protected] or by referring to www.yieldstreetalternativeincomefund.com. The prospectus should be read carefully before investing in the Fund. Investments in the Fund are not bank deposits (and thus not insured by the FDIC or by any other federal governmental agency) and are not guaranteed by Yieldstreet or any other party.

8 This tool is for informational purposes only. You should not construe any information provided here as investment advice or a recommendation, endorsement or solicitation to buy any securities offered on Yieldstreet. Yieldstreet is not a fiduciary by virtue of any person's use of or access to this tool. The information provided here is of a general nature and does not address the circumstances of any particular individual or entity. You alone assume the sole responsibility of evaluating the merits and risks associated with the use of this information before making any decisions based on such information.

9 Statistics as of the most recent month end.

300 Park Avenue 15th Floor, New York, NY 10022

844-943-5378

No communication by YieldStreet Inc. or any of its affiliates (collectively, “Yieldstreet™”), through this website or any other medium, should be construed or is intended to be a recommendation to purchase, sell or hold any security or otherwise to be investment, tax, financial, accounting, legal, regulatory or compliance advice, except for specific investment advice that may be provided by YieldStreet Management, LLC pursuant to a written advisory agreement between such entity and the recipient. Nothing on this website is intended as an offer to extend credit, an offer to purchase or sell securities or a solicitation of any securities transaction.

Any financial projections or returns shown on the website are estimated predictions of performance only, are hypothetical, are not based on actual investment results and are not guarantees of future results. Estimated projections do not represent or guarantee the actual results of any transaction, and no representation is made that any transaction will, or is likely to, achieve results or profits similar to those shown. In addition, other financial metrics and calculations shown on the website (including amounts of principal and interest repaid) have not been independently verified or audited and may differ from the actual financial metrics and calculations for any investment, which are contained in the investors’ portfolios. Any investment information contained herein has been secured from sources that Yieldstreet believes are reliable, but we make no representations or warranties as to the accuracy of such information and accept no liability therefore.

Private placement investments are NOT bank deposits (and thus NOT insured by the FDIC or by any other federal governmental agency), are NOT guaranteed by Yieldstreet or any other party, and MAY lose value. Neither the Securities and Exchange Commission nor any federal or state securities commission or regulatory authority has recommended or approved any investment or the accuracy or completeness of any of the information or materials provided by or through the website. Investors must be able to afford the loss of their entire investment.

Investments in private placements are speculative and involve a high degree of risk and those investors who cannot afford to lose their entire investment should not invest. Additionally, investors may receive illiquid and/or restricted securities that may be subject to holding period requirements and/or liquidity concerns. Investments in private placements are highly illiquid and those investors who cannot hold an investment for the long term (at least 5-7 years) should not invest.

Alternative investments should only be part of your overall investment portfolio. Further, the alternative investment portion of your portfolio should include a balanced portfolio of different alternative investments.

Articles or information from third-party media outside of this domain may discuss Yieldstreet or relate to information contained herein, but Yieldstreet does not approve and is not responsible for such content. Hyperlinks to third-party sites, or reproduction of third-party articles, do not constitute an approval or endorsement by Yieldstreet of the linked or reproduced content.

Investing in securities (the "Securities") listed on Yieldstreet™ pose risks, including but not limited to credit risk, interest rate risk, and the risk of losing some or all of the money you invest. Before investing you should: (1) conduct your own investigation and analysis; (2) carefully consider the investment and all related charges, expenses, uncertainties and risks, including all uncertainties and risks described in offering materials; and (3) consult with your own investment, tax, financial and legal advisors. Such Securities are only suitable for accredited investors who understand and are willing and able to accept the high risks associated with private investments.

Investing in private placements requires long-term commitments, the ability to afford to lose the entire investment, and low liquidity needs. This website provides preliminary and general information about the Securities and is intended for initial reference purposes only. It does not summarize or compile all the applicable information. This website does not constitute an offer to sell or buy any securities. No offer or sale of any Securities will occur without the delivery of confidential offering materials and related documents. This information contained herein is qualified by and subject to more detailed information in the applicable offering materials. Yieldstreet™ is not registered as a broker-dealer. Yieldstreet™ does not make any representation or warranty to any prospective investor regarding the legality of an investment in any Yieldstreet Securities.

YieldStreet Inc. is the direct owner of Yieldstreet Management, LLC, which is an SEC-registered investment adviser that manages the Yieldstreet funds and provides investment advice to the Yieldstreet funds, and in certain cases, to retail investors. RealCadre LLC is also indirectly owned by Yieldstreet Inc. RealCadre LLC is a broker-dealer registered with the Securities and Exchange Commission (“SEC”) and a member of the Financial Industry Regulatory Authority (“FINRA”) and the Securities Investor Protection Corporation (“SIPC”). Information on all FINRA registered broker-dealers can be found on FINRA’s BrokerCheck. Despite its affiliation with Yieldstreet Management, LLC, RealCadre LLC has no role in the investment advisory services received by YieldStreet clients or the management or distribution of the Yieldstreet funds or other securities offered on our through Yieldstreet and its personnel. RealCadre LLC does not solicit, sell, recommend, or place interests in the Yieldstreet funds.

Yieldstreet is not a bank. Certain services are offered through Plaid, Orum.io and Footprint and none of such entities is affiliated with Yieldstreet. By using the services offered by any of these entities you acknowledge and accept their respective disclosures and agreements, as applicable.

Investment advisory services are only provided to clients of YieldStreet Management, LLC, an investment advisor registered with the Securities and Exchange Commission, pursuant to a written advisory agreement.

Our site uses a third party service to match browser cookies to your mailing address. We then use another company to send special offers through the mail on our behalf. Our company never receives or stores any of this information and our third parties do not provide or sell this information to any other company or service.

Read full disclosure