CAGR Calculator

Understanding CAGR (Compound Annual Growth Rate)

CAGR is one of the most accurate ways to measure investment returns over time. It represents the rate at which an investment would have grown if it increased at a steady rate, compounded annually.

How to Calculate CAGR

CAGR = [(Final Value ÷ Initial Value)^(1 ÷ Number of Years)] - 1

For example, if you invested $10,000 and it grew to $25,000 over 5 years:

CAGR = [(25,000 ÷ 10,000)^(1 ÷ 5)] - 1 = 20.11%

Why CAGR Matters

• Smooths Volatility: Shows average annual growth despite market fluctuations
• Comparable Metric: Allows apples-to-apples comparison across different time periods
• Realistic Picture: More accurate than simple average returns
• Planning Tool: Helps project future investment values
• Performance Benchmark: Standard metric for comparing investments

CAGR vs. Average Annual Return

CAGR is different from simple average return and typically more useful:

Example comparing CAGR and Simple Average:

• Year 1: +50% return
• Year 2: -50% return
• Simple Average: (50% + (-50%)) ÷ 2 = 0%
• CAGR: $10,000 → $15,000 → $7,500 = -13.4%

The CAGR accurately reflects your actual loss, while simple averaging misleadingly suggests breaking even.

What's a Good CAGR?

CAGR benchmarks vary by asset class and time period:

• S&P 500 (Historical): ~10% over long periods (70+ years)
• Bonds (Investment Grade): 4-6% typically
• Real Estate: 8-12% in strong markets
• Individual Stocks: Highly variable, 15%+ considered excellent
• High Growth Tech: 20-50%+ possible (but higher risk)

Using CAGR for Investment Decisions

Compare Investments:

CAGR makes it easy to compare different investments over different time periods. An investment with 15% CAGR over 10 years can be directly compared to one with 12% CAGR over 5 years.

Set Realistic Goals:

Understanding CAGR helps set achievable investment targets. Doubling your money requires:

• 7.2% CAGR for 10 years
• 10.4% CAGR for 7 years
• 14.9% CAGR for 5 years

The Rule of 72

A quick way to estimate doubling time:

Years to Double = 72 ÷ CAGR

• At 8% CAGR: 72 ÷ 8 = 9 years to double
• At 12% CAGR: 72 ÷ 12 = 6 years to double
• At 6% CAGR: 72 ÷ 6 = 12 years to double

Limitations of CAGR

• Ignores Volatility: Doesn't show the ups and downs during the period
• No Risk Measurement: Two investments with same CAGR may have vastly different risk profiles
• Assumes Reinvestment: Presumes all gains are reinvested at the same rate
• Single Point Measurement: Only looks at beginning and ending values
• Timing Dependent: Starting and ending dates significantly impact results

Complementary Metrics

Use CAGR alongside other metrics for complete picture:

• Standard Deviation: Measures volatility and risk
• Sharpe Ratio: Risk-adjusted returns
• Maximum Drawdown: Largest peak-to-trough decline
• Alpha/Beta: Performance vs. market benchmark

CAGR for Different Investment Types

Stocks:

• Include dividends in final value for total return CAGR
• Long-term CAGR more meaningful (5+ years)
• Compare against relevant benchmarks

Real Estate:

• Include rental income in calculations
• Factor in leverage (mortgage) effects
• Consider transaction costs

Business Valuation:

• Used to evaluate company revenue growth
• Compare earnings growth between companies
• Project future valuations

Practical Applications

Retirement Planning:

Calculate how much you need to save based on expected CAGR. If you need $1 million in 30 years and expect 8% CAGR, you need to invest approximately $99,000 today.

Portfolio Performance:

Track your portfolio's CAGR annually to ensure you're meeting goals. If target is 10% but you're achieving 7%, reevaluate strategy.

Fund Selection:

Compare mutual funds and ETFs using CAGR over 5 and 10-year periods. Consistent performers often show steady CAGR across timeframes.

Common CAGR Mistakes

• Calculating from market peak or trough (cherry-picking dates)
• Not accounting for fees and taxes in calculations
• Extrapolating short-term CAGR too far into future
• Comparing CAGR across vastly different risk levels
• Ignoring the impact of contributions and withdrawals