What CAGR means
The compound annual growth rate is the steady yearly rate that would take an investment from its starting value to its ending value over a set number of years. Real returns bounce around year to year, but CAGR smooths them into one clean figure, which makes it the fairest way to compare investments held for different lengths of time.
The CAGR formula
CAGR = ((ending value / starting value) raised to the power of 1 / years) minus 1, then times 100.
Worked example
An investment grows from 1,000 to 2,000 over 5 years. The total growth is 100%, but the CAGR is only about 14.9% a year, because each year's growth compounds on the last. That 14.9% is the number to compare against other investments.
CAGR vs average return
CAGR is not the same as a simple average of yearly returns. A fund that gains 50% then loses 50% has an average return of 0% but a negative CAGR, because it ends below where it started. CAGR tells the truth about what actually happened to your money.
Frequently asked questions
What is CAGR?
Compound annual growth rate: the constant yearly rate that would grow a starting amount into an ending amount over a given number of years, with each year compounding on the last.
How is CAGR different from average annual return?
A simple average ignores compounding and can be misleading. CAGR reflects the actual start-to-end result, so a 50% gain then a 50% loss shows as a loss, not zero.
What is a good CAGR?
It depends on the asset and risk. For long-term stock market investing, high single digits to low double digits is often considered solid, but past growth never guarantees the future.