When comparing investments or tracking your portfolio growth, Compound Annual Growth Rate (CAGR) tells you the steady annual growth rate your investment would have had if it grew at the same rate every year.
How to Use the Calculator
Using the CAGR calculator is simple:
Enter the Beginning Value
This is the amount you originally invested.Enter the Ending Value
This is the final value of your investment after it grew.Enter the Number of Years
This is how long the investment was held.View the Result
The calculator will instantly show your CAGR as a percentage — the steady rate your investment grew each year.
Example:
If you started with $5,000 and ended with $7,500 after 3 years, your CAGR will show as 14.47%.
CAGR Formula
CAGR = (Ending Value / Beginning Value) ^ (1 / Number of Years) - 1
Why CAGR Matters
CAGR smooths out the volatility of investment returns. Even if your portfolio grew unevenly year to year, CAGR shows what constant growth rate would produce the same result. It’s great for:
- Comparing different investments
- Planning long-term financial goals
- Understanding performance over time
Try it above with your own numbers!
Example
If you invested $10,000 and ended up with $14,641 after 5 years, your CAGR would be:
CAGR = (14641 / 10000) ^ (1 / 5) - 1 = 7.92%
Why Is My CAGR Lower Than the Simple Average?
It's common to notice that the Compound Annual Growth Rate (CAGR) is lower than the simple average of your annual returns. This isn't a mistake, it's a reflection of how compounding and volatility affect your investment over time.
Let’s say you had the following annual returns:
| Year | Return |
|---|---|
| 1 | +50% |
| 2 | -30% |
| 3 | +40% |
Simple Average
To calculate the simple average return:
(50% + (-30%) + 40%) / 3 = 20%
CAGR
Now let’s calculate the CAGR. Suppose you started with $1,000:
- After Year 1: $1,000 × 1.50 = $1,500
- After Year 2: $1,500 × 0.70 = $1,050
- After Year 3: $1,050 × 1.40 = $1,470
Now apply the CAGR formula (or use the calculator above):
CAGR = (1470 / 1000) ^ (1 / 3) - 1 = 13.7%
Why the Difference?
The simple average doesn't account for the order of returns or how losses hurt more than gains help. A -30% drop requires a +42.9% gain just to get back to even. CAGR, on the other hand, reflects the actual growth of your money over time, incorporating compounding and volatility drag.
In short:
- Simple average overstates growth.
- CAGR shows what you actually earned per year, compounded.
That's why smart investors and analysts rely on CAGR to get a more accurate picture of long-term performance.