- What is CAGR and why is it different from average return?
- CAGR is the constant annual rate at which a value would have to grow each year, compounding, to go from the starting value to the ending value. The arithmetic average of yearly returns (the "average return") is almost always higher than CAGR because compounding penalizes volatility. Example: a portfolio that gains 100% one year and loses 50% the next has an arithmetic average return of (+100% − 50%) / 2 = +25%, but a CAGR of 0% — you ended exactly where you started. Anyone showing you "average" returns instead of CAGR for a multi-year history is either confused or selling something. CAGR is what your money actually did.
- What's the CAGR formula?
- CAGR = (End / Start)^(1/years) − 1, expressed as a percentage. Worked example: $10,000 grows to $25,000 over 7 years. CAGR = (25000 / 10000)^(1/7) − 1 = 2.5^(0.1429) − 1 = 1.1399 − 1 = 0.1399, or 13.99%. The calculator runs this exact formula; the value is shown as a percentage so you can compare it directly to other annualized return numbers.
- Can CAGR be negative?
- Yes. If the ending value is less than the starting value, CAGR is negative — that's the annualized rate of loss. The calculator displays negative CAGRs in red so you don't miss the sign. Example: a $10,000 investment falls to $5,000 over 5 years; CAGR is −12.94% per year. Negative CAGR is useful for measuring how badly an underperforming asset annualizes, especially when comparing it to alternatives that would have grown at a positive rate over the same period.
- How does CAGR differ from IRR?
- CAGR assumes a single starting cash flow and a single ending cash flow — money in at time zero, money out at time T, nothing in between. IRR (Internal Rate of Return) handles multiple cash flows at different times: an investment with monthly contributions, periodic distributions, or staggered purchases needs IRR, not CAGR. If you bought once, held, and sold once, CAGR is exact. If you dollar-cost-averaged or took dividends out along the way, IRR is the right tool. The two converge when there's a single inflow and a single outflow.
- Does CAGR account for dividends or fees?
- Only if you bake them into the start and end values. CAGR is just a transformation of two numbers and a time period — it has no idea what's inside the numbers. For a stock with dividends, use the total return (price appreciation + reinvested dividends) for the ending value, not the bare share price. For a mutual fund with annual fees, the ending value should already reflect fees taken out, which is what fund-reported NAV does. The calculator gives you the right answer for whatever start and end you feed it; making sure those numbers are apples-to-apples is on you.
- Why does CAGR look low compared to my best year?
- Because CAGR is the geometric mean of yearly returns, and the geometric mean is always less than or equal to the arithmetic mean. Stock markets in particular have a few big up years interleaved with the occasional crash; the crash years drag the compound result down more than the big up years lift it. The S&P 500's long-run CAGR (~10% nominal, ~7% real after inflation) sits well below the best individual years (40%+) precisely because of this. A 50% loss requires a 100% gain to recover — the arithmetic doesn't smooth out the way intuition suggests.
- What's a 'good' CAGR for an investment?
- Depends on the benchmark and the period. For US large-cap stocks (S&P 500), the long-run nominal CAGR is around 10% — anything meaningfully below that, over a comparable period, is underperforming the basic index. For a bond portfolio, 3–5% is reasonable. For a savings account, 0.5–4% depending on the rate environment. For a private business or real estate investment, double-digit CAGR is often required to compensate for the illiquidity and concentration risk. The most important comparison isn't a fixed threshold; it's CAGR vs the relevant benchmark over the same period.
- Can I use CAGR for things that aren't investments?
- Yes — anything that grows or shrinks over a time period. Common uses: revenue growth (a company going from $50M to $200M revenue over 8 years has a CAGR of 18.92%), user-base growth, customer count, GDP growth, population growth. The math doesn't know or care what's being measured. As long as you have a starting quantity, an ending quantity, and a time period, the formula gives you the constant annual rate. The interpretation depends on context — a 30% revenue CAGR is exceptional for a mature company and routine for an early-stage startup.
- What's the Rule of 72 and how does it relate to CAGR?
- Rule of 72 is a mental-math shortcut: dividing 72 by the CAGR gives the approximate number of years for an investment to double. A 6% CAGR doubles money in roughly 12 years (72 / 6); a 12% CAGR doubles it in roughly 6 years. The exact CAGR to double in 10 years is 7.18%, and the rule predicts 7.2% — pretty close. The approximation works best for rates between 4% and 15%; outside that range it drifts. Useful for sanity-checking whether a stated CAGR matches intuition: if someone says their portfolio doubled in 5 years, that's a ~15% CAGR, not the 8% they might claim from the arithmetic average.
