What CAGR actually tells you
CAGR — Compound Annual Growth Rate — is the constant yearly rate that would carry an investment from its starting value to its ending value, smoothed over the whole period. Real investments never grow at a perfectly constant rate; some years are up sharply, others are flat or negative. CAGR ignores that entire path and just answers: "if it had grown steadily instead, what rate would that have been?"
That makes it the right tool for comparing two investments with different volatility and different holding periods on equal footing — but the wrong tool for understanding how bumpy the ride actually was. A fund that returned 12% CAGR by going up 40% one year and down 15% the next looked nothing like a fund that returned 12% every single year, even though this number treats them identically.
How it is calculated
CAGR = [(Ending value ÷ Starting value)1/n − 1] × 100
where n is the number of years between the two values.
Frequently asked questions
Is CAGR the same as average annual return?
No, and this is the most common mix-up. A simple average of each year's return can be pulled upward by one great year even if the investment lost money overall — CAGR looks only at the start and end values, so it can never disagree with what actually happened to your money.
Can CAGR be negative?
Yes — if the ending value is lower than the starting value, CAGR comes out negative, correctly showing the investment lost value overall, however uneven the path was.
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