Average Annual Growth Rate (AAGR) is an important tool used to help investors measure the performance of their investments. It is a linear measure which provides an indication of the average rate of return over a certain period of time. AAGR is calculated by taking the simple arithmetic mean of a series of returns, and is usually expressed as a percentage.

AAGR uses historical returns over the past year, five years, ten years and more, to track the performance of an investment. It is more accurate than industry averages as it takes into account the actual performance of the investment portfolio over time instead of industry averages, which may be outdated by the time they’re published. AAGR is useful for comparing the performance of investments in different asset classes and for evaluating the returns of actively-managed funds against passive index funds.

The calculation of AAGR does not account for the effects of compounding. To account for compounding, an investor must calculate a compound annual growth rate (CAGR) instead. CAGR calculates the average return based on the initial and ending values of an investment, taking into account the compounding effect of reinvesting returns.

While AAGR is a useful tool for tracking an investment’s performance over a certain period of time, it is important to remember that it does not fully capture the total return of an investment. Factors such as dividends and capital gains, which can have a significant impact on the total return, are not taken into account when calculating AAGR. For this reason, investors should make sure to consider all sources of return when evaluating their investments.

In conclusion, Average Annual Growth Rate (AAGR) is a useful tool for measuring the performance of investments over time. It is a linear measure that does not take into account the effects of compounding, so investors must calculate a compound annual growth rate (CAGR) to properly account for this. Additionally, AAGR does not consider other sources of return such as dividends and capital gains, so it should not be used in isolation when evaluating an investment’s returns.