Growing at 15% a year - what does this entail?

To achieve a 100% gain in your investment over 5 years, the initial capital has to grow at a compound rate of 15% per year. This means that an initial $100 investment will be worth:

$1.15 at end of year 1,
$1.33 at end of year 2,
$1.52 at end of year 3,
$1.75 at end of year 4, and
$2.01 at end of year 5.

Though the fund managers usually benchmark their fund performances to a certain index, most individual investors should look at the absolute return.

The return on your investment is unlikely to rise in a straight-line upwards. Volatility in the return is to be expected. The return spurts over certain times, declines over certain times, and remains unmoved over certain times.  However, the return over a long time is less volatile and generally relates to the earnings of the business of the invested stock.

What does 15% per year looks like in real-time? Excluding the dividend yield from the calculation, it is actually an average of 1.25% per month appreciation in the share price. The 15% may be returned in a consistent manner or there maybe periods of spurts delivering part or all the returns over many short periods. Do not get disheartened if a stock moves only 1% or 2% per month, it is the consistency in its return that adds to a big return. On the other hand, do not be overly excited by the big returns over a short period. For the long-term investors, it is more important that over a long time, the price of the stock reflects the improving earnings fundamentals of your selected stocks.

To double your initial investment in a stock in 5 years means also selecting a stock that will double its earnings in 5 years. For those who are directly in business, to grow a business consistently over many years is indeed very challenging. The matured large companies are less likely to deliver such growths. Therefore, for those investors seeking such growth rates in the earnings of their stocks, they will need to look at mid-cap stocks or smaller companies where growths can be faster in the early stages of their business life.

It is not difficult to make 7 or 8% returns yearly in your investment in stocks.  However, to grow at 15% or more, this can be very challenging indeed, but not impossible even for the non-professional investors.

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Summary

The Realities of 15% Annual Growth

Achieving a 15% compound annual return is a challenging but possible goal that will double your investment in approximately five years. The article outlines what this growth entails in practice:

• The Power of Compounding: A 15% yearly return means your money doubles in 5 years (e.g., $100 becomes $200). This equates to a more modest-looking average of 1.25% growth per month.

• Embrace Volatility, Focus on the Long Term: Returns are never smooth. There will be periods of spurts, declines, and stagnation. Long-term investors should ignore this short-term volatility and focus on whether the company's earnings fundamentals are improving over time, as the stock price will eventually reflect this.

• The Earnings Imperative: For a stock to double in price in five years, the company must also be on a path to double its earnings in that same period.

• Where to Find Such Growth: Mature, large companies are unlikely to deliver this level of growth. Investors seeking 15% returns typically need to look at mid-cap or smaller companies that are in faster-growth phases of their business life.

• A Challenging Benchmark: While making 7-8% per year is more attainable, consistently achieving 15% is very challenging, though not impossible, even for non-professional investors. The key is to focus on the underlying business earnings rather than short-term price movements.