Calculate the Compound Annual Growth Rate (CAGR) of an investment, given its beginning value, ending value, and the number of years held.
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CAGR = (Ending Value ÷ Beginning Value)^(1 ÷ Years) − 1. It represents the single, steady annual growth rate that would take your beginning value to your ending value over the given period, smoothing out any ups and downs that happened along the way.
For example, an investment that grows from 10,000 to 25,000 over 8 years has a CAGR of (25,000 ÷ 10,000)^(1/8) − 1, which works out to about 12.1% per year, even though the actual year-to-year returns may have varied considerably.
Because CAGR expresses growth as a single smoothed annual rate, it makes it easy to compare investments held over different time periods or with very different volatility, something a simple total return percentage can't do on its own. It's widely used to compare the historical performance of stocks, funds, and businesses.
Confusing CAGR with the average of yearly percentage returns, arithmetic averaging overstates true growth whenever returns are volatile, CAGR is the geometric measure that accounts for compounding correctly.
Comparing CAGR figures across investments held for very different time periods without noting that a short, lucky window can produce a misleadingly high CAGR.
Assuming a strong historical CAGR will continue at the same rate going forward, CAGR describes what happened, not a guaranteed future rate.
Not exactly. CAGR is a geometric average that reflects compounding, while a simple average of yearly returns (an arithmetic mean) doesn't account for how returns compound over time and can overstate actual growth, especially when returns are volatile.
Yes, if the ending value is lower than the beginning value, CAGR will be negative, reflecting an overall decline over the period.
No, CAGR only looks at the beginning and ending values. Two investments can have the same CAGR but very different levels of volatility along the way.
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