🎯 Annual Investment System Simulator: A Smarter Way to Track CAGR and Returns

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Investing is as much about discipline as it is about numbers. The Annual Investment System Simulator provides a simplified yet powerful framework for understanding long-term investment outcomes when working with a fixed strategy. Let’s break down how this works and why it matters.

📊 Overview of the System

  • Investment Strategy: ₹1,00,000 total capital, divided annually into 10 stocks, each held for 1 year.

  • Win Ratio: 60% – implying that 6 out of 10 stock picks result in a gain.

  • Risk-Reward Ratio: 1:2 – for every ₹1 of potential loss, there is a ₹2 potential gain.

  • Risk per Stock: 15% – this is the maximum loss tolerated per investment.

link:  https://claude.ai/public/artifacts/fa66906c-2b8f-4f45-a759-72f6f755dcbc

📈 Understanding the Expected Annual Return

The simulator uses a classic formula to calculate expected return based on the defined parameters:

🧒🏼‍🔬 Formula:

Expected Return = (Win Rate × Reward × Risk) - (Loss Rate × Risk)

💡 Calculation:

= (60% × 2 × 15%) - (40% × 15%)
= 18% - 6% = ✅ +12% Expected Annual Return

This tells us that with a 60% success rate and a 1:2 risk-reward ratio, the portfolio is expected to grow by 12% annually. Over a decade, this compounds significantly.

📉 Risk Management Matters

The key to the system’s stability is strict risk management:

  • Each stock’s maximum loss is capped at 15%, preventing catastrophic capital erosion.

  • Winners are allowed to run up to 30% gains, due to the 1:2 reward system.

This creates a balance where even a slightly better-than-random win rate (60%) yields positive and sustainable results.

🗕️ CAGR and Time in the Market

With time, consistent application of this system leads to Compound Annual Growth Rate (CAGR) improvements. While the simulator currently shows 0% CAGR and 0 years invested, once investments begin, the power of compounding kicks in.

For example:

  • Year 1 Portfolio Value: ₹1,00,000 → ₹1,12,000 (expected)

  • Year 5 (compounded): ₹1,00,000 → ₹1,76,234+

  • Year 10: ₹1,00,000 → ₹3,10,585+

🔄 Why Annual Rotation?

Rotating stocks yearly allows:

  • New market opportunities

  • Rebalancing based on recent performance

  • Managing sector-specific risk

🚀 Conclusion

The Annual Investment System Simulator is a simple yet effective way to visualize and test disciplined investing with controlled risk. By keeping risk defined and reward potential higher, and focusing on consistency over time, even modest win ratios lead to strong long-term growth.

If you're just starting your investment journey or want a methodical approach to evaluating your strategy — this simulator is an excellent learning tool.

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