Aug 2, 2016

Cory Diary : Misleading CAGR

Smoothed return

It assumes a smoothed return over the period that’s measured. In reality, investments experience significant short-term ups and downs. Be careful when you are sold with 1 Year to 8 Years performance. On 7-8 years, there's a low due to GFC that time in 2008 on crash and huge recovery. All monkeys able to perform. Fine ! Not all monkeys just "99.5%".


Size of fund

What this means is that a fund manager can work on multiple small funds, and then select the few that happens to wins over the measured period and present them to you. Which will convince the most sceptic their performance. 


Ins and Outs

It doesn't work on personal equity investment which has multiple transactions. 

From Investopedia,

"CAGR is very straightforward when there is a beginning and ending value, and set period of time. But in reality, investments, such as mutual funds, have continuous cash inflows and outflows and are required to report monthly, quarterly, annual, and even daily returns."


Cory
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