CAGR Calculator
The steady yearly rate implied by a starting and an ending value.
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Formula
How the calculation works
CAGR is the single steady rate that would take a starting value to an ending value over a period. 25,000 growing to 41,000 over seven years implies 7.32% a year, even though the actual yearly returns were almost certainly nothing like 7.32% each. It is a smoothed figure, and that is its value: it makes investments of different lengths comparable.
It is not an average of the yearly returns, and the difference is largest when returns are volatile. An investment that gains 50% one year and loses 50% the next has an arithmetic average of zero but a CAGR of about minus 13% a year, because 1.5 times 0.5 is 0.75. Volatility itself costs money, and only the geometric measure shows it.
CAGR is silent about the path. Two investments with the same CAGR can have wildly different risk, and one may have spent years below its starting value. It is a comparison tool, not a description of what holding the investment felt like.
Common mistakes
- Averaging the yearly returns and calling it CAGR, which ignores the cost of volatility.
- Reading CAGR as a forecast. It describes what already happened between two values, not what will happen next.
- Comparing a CAGR over three years with one over fifteen as if the periods were equivalent. Shorter periods flatter the figure.
When to use it
- Use it to compare funds, plans or businesses over different periods on one footing, and to sanity-check a quoted growth rate.
- It is a summary, not a plan. For a projection with contributions, or for judging risk, it is the wrong tool.
Worked example
25,000 growing to 41,000 over seven years is 64% in total, or 7.32% a year.
Common questions
Can I just average the yearly returns?
No. A simple average ignores the effect of swings and comes out too high. An investment that gains 50% then loses 50% averages zero but has actually lost money, and CAGR shows that.
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