The Compound Annual Growth Rate (CAGR) is a representational figure, rather than a true return rate. It describes the rate at which an investment would have grown if it had grown the same rate every single year and the profits were reinvested at the end of each year.
The "Smoothing" Effect
Real markets are volatile. You might make 20% one year and lose 10% the next. CAGR smooths out this jagged line into a single, easy-to-compare percentage.
Why Use CAGR?
Comparability: It allows you to compare the performance of two investments held for different time periods.
Objective Measurement: It is one of the standard metrics used by fund managers and investors to evaluate performance relative to benchmarks like the S&P 500.
Goal Planning: It helps you determine the required rate of return to reach a specific financial goal (e.g., "I need a 7% CAGR to retire in 20 years").
Essentially, you are dividing the final value by the start value to get the total multiple, and then taking the "nth root" of that multiple to find the annual rate.
Limitations of CAGR
While powerful, CAGR has blind spots:
Ignores Volatility: A steady 8% return and a wild, risky path to the same 8% return look identical in CAGR.
Input Sensitivity: It is purely calculated on the start and end values. If you withdraw money or add money during the period, the standard CAGR formula breaks (you need "Money-Weighted Return" or XIRR for that).
Real World Examples
Company Growth
CAGR is often used to track business metrics like revenue or user growth. "Our revenue grew at a 25% CAGR over the last 5 years" is a standard pitch to investors.
Investment Funds
Mutual funds report their 3-year, 5-year, and 10-year CAGRs. Always compare these against the fund's benchmark index.
Frequently Asked Questions
Detailed answers about CAGR
How is CAGR different from Average Annual Return?
Average return is a simple arithmetic mean (e.g., (+50% - 50%) / 2 = 0%). CAGR is a geometric mean that accounts for compounding. In that same example, if $100 goes to $150 (+50%) then back to $75 (-50%), you lost money. The average return says 0%, but the CAGR is correctly negative (-13.4%). CAGR is the truth.
Can CAGR be negative?
Yes. If the ending value is lower than the beginning value, the CAGR will be negative, indicating the annualized rate at which you lost capital.
CAGR vs. IRR (Internal Rate of Return)?
CAGR is best for a single lump-sum investment held for a period. IRR is better if you have multiple cash flows (deposits and withdrawals) happening at different times during the investment period.
Can I use CAGR for periods less than a year?
Technically yes, but it can be misleading. "Annualizing" a 10% return earned in 1 month results in a massive (and likely unrealistic) CAGR. It is best used for periods of 1 year or longer.
How does inflation affect CAGR?
The standard calculation gives you the "nominal" CAGR. To find the "real" CAGR (purchasing power growth), you subtract the inflation rate from the result. A 7% nominal CAGR with 3% inflation is roughly a 4% real CAGR.
Is high CAGR always better?
Not necessarily. A high CAGR often comes with high risk (volatility). A portfolio with a 15% CAGR that crashes 50% occasionally might be harder to stick with than a portfolio with a steady 10% CAGR.
Can I use CAGR for debt?
Yes. You can calculate the CARG of a debt load growing. If your credit card debt went from $1,000 to $5,000 in 3 years, calculating the CAGR will show you the terrifying effective interest rate you are paying (including fees/penalties).
How do I handle irregular time periods?
Calculators (like this one) often handle fractional years (e.g., 2.5 years). The formula (1 / n) works perfectly with decimals, so you don't need to round to the nearest whole year.
Should I use before-fee or after-fee values?
Use after-fee, after-tax values to reflect your actual investor experience. Published fund CAGRs are typically before personal taxes, so your realized CAGR may differ.
Summary
The CAGR Calculator computes the compound annual growth rate from a beginning value to an ending value over a specified number of years.
CAGR is the gold standard for comparing investment performance across different time periods.
Use this to evaluate investments, compare to benchmarks, and set realistic growth expectations.
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Calculate annualized growth between beginning and ending values over time.
How to use CAGR (Compound Annual Growth Rate) Calculator
Step-by-step guide to using the CAGR (Compound Annual Growth Rate) Calculator:
Enter your values. Input the required values in the calculator form
Calculate. The calculator will automatically compute and display your results
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Frequently asked questions
How do I use the CAGR (Compound Annual Growth Rate) Calculator?
Simply enter your values in the input fields and the calculator will automatically compute the results. The CAGR (Compound Annual Growth Rate) Calculator is designed to be user-friendly and provide instant calculations.
Is the CAGR (Compound Annual Growth Rate) Calculator free to use?
Yes, the CAGR (Compound Annual Growth Rate) Calculator is completely free to use. No registration or payment is required.
Can I use this calculator on mobile devices?
Yes, the CAGR (Compound Annual Growth Rate) Calculator is fully responsive and works perfectly on mobile phones, tablets, and desktop computers.
Are the results from CAGR (Compound Annual Growth Rate) Calculator accurate?
Yes, our calculators use standard formulas and are regularly tested for accuracy. However, results should be used for informational purposes and not as a substitute for professional advice.