Calculate the Compound Annual Growth Rate of your investments. CAGR shows the smoothed annual return, assuming profits are reinvested at the end of each period.
Compound Annual Growth Rate (CAGR) is one of the most important metrics in finance and investing. It represents the mean annual growth rate of an investment over a specified period longer than one year. Unlike simple average returns, CAGR accounts for the compounding effect—the phenomenon where investment gains generate their own gains over time, creating exponential growth.
CAGR is particularly valuable because it “smooths out” volatile returns to show a consistent growth rate. For example, if your investment grows 50% one year, drops 20% the next, and gains 30% the third year, the simple average would be 20% annually. However, the actual CAGR would be approximately 16.8%, providing a more accurate picture of true compounded growth. This makes CAGR essential for comparing investments with different volatility profiles.
CAGR = (Ending Value / Beginning Value)1/n − 1
Where:
The formula takes the ratio of ending to beginning value, raises it to the power of 1 divided by the number of years, and subtracts 1. The result is expressed as a percentage representing the annual growth rate that would be required to grow from the beginning value to the ending value over the specified period.
| Metric | Best Used For | Limitation |
|---|---|---|
| CAGR | Comparing long-term investments | Ignores volatility/risk |
| Simple Average Return | Quick estimates | Overstates actual returns |
| Total Return | Overall investment performance | Doesn't account for time |
| IRR (Internal Rate of Return) | Investments with cash flows | Complex to calculate |
S&P 500 (1957-2023)
~10.5% CAGR
Including dividends reinvested
US Real Estate (1991-2023)
~4.3% CAGR
Case-Shiller Home Price Index
Gold (1971-2023)
~7.8% CAGR
Since gold standard ended
US Treasury Bonds (10yr)
~5.2% CAGR
Historical average yield
Note: CAGR assumes consistent growth and reinvestment of returns. Past performance does not guarantee future results. Consult a financial advisor for investment decisions.