What Is CAGR?
Compound Annual Growth Rate (CAGR) is the rate at which an investment would have grown if it had grown at a perfectly steady rate, compounded annually, from its starting value to its ending value. It is the single most useful number for comparing investment performance over different time periods because it smooths out year-to-year volatility into one honest annual figure.
For example, if you invested $1,000 and it grew to $2,500 over 5 years, the CAGR is approximately 20.1% — meaning your investment grew at the equivalent of 20.1% every single year, compounded. In reality, it may have surged one year and fallen another, but CAGR captures the net result.
The CAGR Formula
Where n is the number of years. Enter your starting value, ending value, and time period above, and the calculator applies this formula instantly.
Why CAGR Is More Accurate Than Average Return
The arithmetic average of annual returns overstates investment performance in volatile markets. Consider: Year 1 returns +100%, Year 2 returns −50%. Average return = 25%. But you end exactly where you started — a true return of 0%. CAGR = 0%, which is correct. The average lied; CAGR told the truth.
This is why professional fund managers, financial analysts, and company earnings reports always use CAGR (or time-weighted returns) when presenting multi-year performance. Simple averages consistently flatter volatile results.
CAGR Benchmarks: What Is a Good Rate?
| Investment Type | Historical CAGR |
|---|---|
| High-yield savings account | 4.5–5.5% |
| US Treasury bonds (10-year) | 3–5% |
| Real estate (national average) | 4–6% |
| S&P 500 Index (1957–2024) | ~10.7% nominal |
| Strong individual business revenue | 20–30%+ |
| Warren Buffett / Berkshire (1965–2023) | ~19.8% |
Limitations of CAGR
- Ignores volatility: Two investments with the same CAGR can have very different risk profiles. Always pair CAGR with a volatility measure.
- Assumes lump-sum investing: CAGR does not account for ongoing contributions or withdrawals. For portfolios with regular cash flows, use Internal Rate of Return (IRR) instead.
- Can be cherry-picked: Because CAGR depends on the start and end date, always examine performance across multiple time windows — not just the most favorable one.
- Excludes dividends (unless reinvested): Price-only CAGR understates total return for dividend-paying stocks. Total return CAGR (assuming reinvestment) is more relevant for long-term investors.
Frequently Asked Questions
Can CAGR be negative?
Yes. If an investment loses value over the period, the CAGR will be negative. A $10,000 investment that falls to $7,000 over 5 years has a CAGR of approximately −6.7% — the annualized rate at which the investment declined.
Can I use CAGR for periods shorter than a year?
Yes — use a decimal for n. A 6-month period is n = 0.5. The formula works the same way. However, very short-period CAGRs extrapolated to annual figures can be misleading, as they assume the same rate continues for a full year.
What is the difference between CAGR and IRR?
CAGR assumes a single lump-sum investment with no additional cash flows. IRR handles multiple cash flows at different times — making it better for evaluating real projects, portfolios with ongoing contributions, or business investments with phased spending.