Trading term

What is CAGR (compound annual growth rate)?

CAGR is the one steady yearly rate that would have taken your money from where it started to where it ended. The S&P 500 averaged 11.86% a year from 1928 to 2025, but it compounded at 10.02%, and the lower number is the one that built the balance. The average tells you what the years looked like. The CAGR tells you what you got.

CAGR needs three things: what you started with, what you finished with, and how many years passed. It ignores everything in between. Put $10,000 in, take $46,610 out twenty years later, and your CAGR is 8.00% a year. That's the rate a savings account would have had to pay, with no drama at all, to leave you in the same place.

It differs from a simple average because averages add and money multiplies. Take a fund that gains 50% one year and loses 50% the next. The average of +50 and -50 is zero, so on paper you broke even. Your $10,000 went to $15,000 and then to $7,500. You're down a quarter. The CAGR is about -13.4% a year, and that's the number that matches your statement.

The gap between the two always runs the same way. The average is the higher number every time, and the bigger the swings, the wider the gap gets. There's a quick rule for how wide. Take the standard deviation as a decimal, square it, halve it. The S&P's 19.40% gives 0.0188, or 1.88 percentage points, and the real gap over those 98 years was 1.84 points. Close enough to be useful.

What CAGR won't do is describe the ride. It's a smooth line drawn from the first point to the last, with no memory of anything in between. Two funds with identical 10% CAGRs can feel nothing alike to own. And it only ever describes the past. A ten-year CAGR is what happened over a window somebody picked, and shifting the start date by a year in either direction can move it a long way.

For example

You put $10,000 into a fund. Year one it gains 50%, so you're sitting at $15,000. Year two it loses 50%, so you're at $7,500. The fund can honestly advertise an average annual return of 0%, because +50 and -50 average out to nothing. Your CAGR is -13.4% a year and you're $2,500 down. Both numbers are correct. Only one of them is in your account.

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Why it matters to you

Fund marketing has two honest numbers it can print, and they aren't the same. Average annual return adds the years up and divides. CAGR compounds them. The average is always the flattering one, and the gap widens with how much the fund has bounced around. If one investment quotes an average and another quotes a CAGR, you aren't comparing like with like. CAGR is also how you compare a three-year record against a fifteen-year one, since it's a per-year rate either way.

⚠ It's a smooth line drawn over a bumpy ride

A 10% CAGR over ten years sounds like 10% a year, ten times over. It almost never was. The same 10% CAGR fits a fund that climbed steadily and a fund that doubled in year one, halved in year four and spent five years clawing back. CAGR can't tell you which one you're looking at, and it says nothing about the worst moment along the way. That moment is what decides whether you're still holding at the end, so read the drawdown and the standard deviation next to it. And a past CAGR is a record, not a forecast.

Frequently asked questions

What is CAGR?

It stands for compound annual growth rate. It's the single steady yearly rate that would take an investment from its starting value to its ending value over a given number of years. It smooths everything that happened in between into one figure you can hold up against another.

What's the difference between CAGR and average annual return?

The average annual return adds up the yearly returns and divides by the number of years. CAGR compounds them instead, so it reflects the balance you actually ended with. Whenever returns vary at all, the average is the higher of the two. For the S&P 500 since 1928 the average is 11.86% and the CAGR is 10.02%, a gap of 1.84 percentage points.

How do you calculate CAGR?

Divide the ending value by the starting value, raise the result to the power of one divided by the number of years, then subtract 1. Say $10,000 grew to $46,610 over 20 years. That's 46,610 divided by 10,000, which is 4.661. Raise 4.661 to the power of 1/20 and you get 1.08, so the CAGR is 8%.

Is a higher CAGR always better?

Not on its own. Two funds with the same CAGR can have wildly different worst moments, and a CAGR measured from a market bottom flatters whatever it's describing. Check the window it covers and the standard deviation beside it before you read much into the number.

Read the full guide

Investing basicsWhat Is Volatility? Why Your Average Return Isn't What You GotVolatility measures how much returns bounce around their average. It also decides how much of that average you keep — a fund can average 8% a year and hand you far less.12 min read

Related terms

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