CAGR Calculator
CAGR turns a total change over several years into the single annual rate that would have produced it. It is the right way to compare investments held for different lengths of time, and the wrong way to describe how volatile the journey was.
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Formula
Why an average is not enough
Arithmetic averages mislead badly on investment returns. Gain fifty percent then lose fifty percent and the average is zero, but you are down twenty-five percent. CAGR is a geometric average, so it reflects what actually happened to the money.
What CAGR hides
It describes a smooth path that almost certainly did not occur. Two investments with identical CAGR can have had completely different experiences — one steady, one collapsing by half before recovering. If the path matters to you, and it usually does when you might need the money at a particular moment, CAGR alone is not enough.
Use it to compare unlike things
Its real strength is normalising across different holding periods. A property held for eleven years and a fund held for four cannot be compared on total return; on CAGR they can. It also lets you sanity-check any claim expressed as a total gain, which is how impressive-sounding but mediocre returns are usually presented.
Contributions break it
CAGR assumes a single lump sum left alone. If you added or withdrew money along the way, this figure will not describe your return; you need a money-weighted measure such as internal rate of return instead.
Frequently asked questions
What is a good CAGR?
It depends entirely on the asset and the period. Broad stock market returns have often landed somewhere around seven to ten percent nominal over long horizons. A CAGR far above that deserves scrutiny of the risk that produced it.
CAGR or average annual return?
CAGR, for anything involving compounding. The simple average of annual returns overstates what you actually earned whenever returns vary, and the more they vary the worse the overstatement.
Can CAGR be negative?
Yes, whenever the ending value is below the beginning value. It then tells you the annual rate of decline.
Does CAGR account for inflation?
Not unless you feed it inflation-adjusted values. To get a real CAGR, deflate the ending value to the starting year's money first.