What is CAGR (compound annual growth rate)?
In one line: CAGR, the compound annual growth rate, is the steady yearly rate that would turn a starting value into an ending value over a set number of years.
A simple example
An investment grows from $10,000 to $16,105 over 5 years.
CAGR = (end ÷ start) ^ (1 ÷ years) − 1.
So: 16,105 ÷ 10,000 = 1.6105. Then 1.6105 ^ (1 ÷ 5) = 1.10. Subtract 1: 10% a year.
The real path was probably bumpy. Up 25% one year, down 5% the next. CAGR smooths that into one steady rate that lands in the same place. Try your own numbers in the CAGR calculator.
Why it matters
It makes things comparable. "Up 61% in 5 years" and "up 30% in 2 years" are hard to compare. As yearly rates (10% vs about 14%), they're easy.
It also links straight to Compound interest. A CAGR is the rate you'd plug into a compounding calculation to get the same result.
A common mistake
Using a simple average instead. Say something rises 50% one year and falls 50% the next.
The simple average is (50 − 50) ÷ 2 = 0%. Sounds like you broke even.
But $100 → $150 → $75. You're down 25%. The CAGR is about −13.4% a year. That's the truer number.
| Year | Return | Value |
|---|---|---|
| Start | — | $100 |
| 1 | +50% | $150 |
| 2 | −50% | $75 |
CAGR hides the ride. Two investments can share a CAGR while one swung far more. Look at the biggest drop along the way too — see Drawdown.
Questions
What is a good CAGR?
It depends on the asset and the risk. Compare it with a simple benchmark, like an S&P 500 index fund over the same years.
Is CAGR the same as average annual return?
No. An average just adds the yearly returns and divides. CAGR accounts for compounding, so it shows what really happened to the money.
Does CAGR include dividends?
Only if the ending value includes them. Using Total return values gives a fuller picture.
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