You bought an investment, it grew — but what was your actual annual return? CAGR (compound annual growth rate) converts any gain over any period into a single annualized percentage you can compare against other investments, benchmarks or inflation.
The CAGR Formula
It answers: “what steady yearly growth rate would have produced this exact result?” That makes it the standard way to compare investments held for different lengths of time.
Worked Example
An investment that grew from $10,000 to $18,000 over 5 years produced a total return of 80% — but its CAGR is 12.47% per year, not 16% (80 ÷ 5). The difference exists because growth compounds: each year’s gains build on the previous year’s.
Frequently Asked Questions
Why use CAGR instead of average annual return?
Averaging yearly returns overstates performance when returns are volatile. CAGR gives the single steady rate that actually turns your starting value into your ending value.
Does CAGR account for deposits and withdrawals?
No — it assumes one starting amount left untouched. If you added or withdrew money along the way, you need a money-weighted return instead.
What is a good CAGR?
Context matters: broad stock indexes have historically delivered roughly 7–10% annually over long periods before inflation, while savings products deliver less with far less risk.