Calculate Compound Annual Growth Rate
CAGR (Compound Annual Growth Rate) = (Ending Value / Beginning Value)^(1 / Number of Years) - 1. This formula calculates the mean annual growth rate of an investment over a specified time period longer than one year.
CAGR provides a "smoothed" rate of return that ignores volatility, making it ideal for comparing different investments. It represents the steady rate at which an investment would have grown if it grew at a constant rate.
Simple average returns can be misleading due to volatility. CAGR accounts for compounding and provides the true geometric mean return. An investment that doubles then halves has a 0% CAGR but a 25% simple average return.
Use CAGR to compare investments with different time horizons. Remember that past CAGR doesn't guarantee future results. Consider risk alongside returns. For planning purposes, use conservative CAGR estimates (6-8% for stocks historically).
CAGR (Compound Annual Growth Rate) measures the mean annual growth rate of an investment over a period longer than one year. It smooths out volatility to show what steady annual return would have produced the same final result. CAGR is useful for comparing the performance of different investments, business revenue growth, or any metric that changes over time, because it accounts for compounding effects.
Average annual return is a simple arithmetic mean that does not account for compounding. CAGR is a geometric mean that reflects the actual compounded growth. For example, an investment that gains 100% one year and loses 50% the next has a simple average return of 25%, but a CAGR of 0% because you end up right where you started. CAGR always gives a more accurate picture of true investment performance over time.
A good CAGR depends on the asset class and risk level. The S&P 500 has historically delivered about 10% CAGR before inflation (roughly 7% after inflation). A CAGR of 15-25% is considered excellent for individual stock investments. For business revenue growth, 10-20% annually is strong for established companies, while startups may target 50% or more. Always compare CAGR against a relevant benchmark and consider the associated risk.