CAGR
InvestingDefinition
Compound Annual Growth Rate is the smoothed annualized return that tells you how fast an investment grew from point A to point B, as if it grew at a perfectly steady rate every year. It strips out volatility to give you the "true" average growth rate.
CAGR is different from simple average return. If a stock goes up 50% one year and down 33% the next, the simple average is +8.5% - but you're back where you started (CAGR = 0%). CAGR captures reality; simple averages lie.
This makes CAGR the standard metric for comparing investment performance across different time periods and asset classes. When someone says "the S&P 500 has returned 10% historically," they mean the CAGR.
CAGR is different from simple average return. If a stock goes up 50% one year and down 33% the next, the simple average is +8.5% - but you're back where you started (CAGR = 0%). CAGR captures reality; simple averages lie.
This makes CAGR the standard metric for comparing investment performance across different time periods and asset classes. When someone says "the S&P 500 has returned 10% historically," they mean the CAGR.
Formula
CAGR = (Ending value / Beginning value)^(1/years) − 1
Example
You invest $10,000 in 2015. By 2025 it's worth $21,589.
CAGR = ($21,589 / $10,000)^(1/10) − 1 = 8.0%
This means your money grew as if it earned exactly 8% every single year, even though actual annual returns varied wildly (some years +20%, some years -15%).
CAGR = ($21,589 / $10,000)^(1/10) − 1 = 8.0%
This means your money grew as if it earned exactly 8% every single year, even though actual annual returns varied wildly (some years +20%, some years -15%).