Free tools / CAGR and Rate of Return Calculator
CAGR Calculator: Annualised Rate of Return
Boil an investment's result down to a single comparable figure: the annualised CAGR alongside the total return.
CAGR, the compound annual growth rate, answers one question: at what constant annual rate would capital have grown from the starting amount to the ending amount over a given period. It is the standard way to compare investments that ran for different lengths of time.
Without CAGR it is easy to misjudge a result. A 60 percent gain sounds great, but if it took nine years to get there, that is just under 5.4 percent a year, less than the headline number suggests.
The formula and how to read it
CAGR is the ending value divided by the starting value, raised to the power of one over the number of years, minus one. The result is a geometric rate rather than an arithmetic mean, and that is precisely why it captures compounding correctly.
The arithmetic mean of annual returns always overstates the outcome when results vary. A year of plus 50 percent and a year of minus 50 percent give an arithmetic mean of zero, yet capital has actually shrunk by a quarter, which CAGR shows outright.
Where CAGR misleads
CAGR smooths the path and says nothing about volatility. Two investments with the same CAGR can differ so much in the depth of their drawdowns that one is bearable and the other is not. It is always worth looking at maximum drawdown alongside CAGR.
The measure is sensitive to its endpoints. Calculated from a bear market bottom to a bull market peak, it will look impressive and be completely unrepresentative. Compare periods of the same length, ideally ones that cover a full market cycle.
Frequently asked questions
How does CAGR differ from total return?
Total return is simply the percentage change in value from the start of the investment to the end, with no reference to time. CAGR spreads that same result evenly across the years, so you can compare a three-year investment with a ten-year one.
Does CAGR account for contributions to the portfolio?
No. CAGR assumes a single initial contribution and a single ending value. If you add money regularly, CAGR on its own will overstate or understate how good your decisions were, because it confuses growth with contributions. In that case use a time-weighted rate of return, or compare the result against a benchmark.
What counts as a good CAGR?
The reference point is the broad market, not a round number. Historically, global equity indices have delivered a few percent a year above inflation. Always judge the result against a benchmark and against the risk you took, because a higher CAGR bought with huge volatility is not necessarily better.
Related calculators
Numbers are one thing, a thesis is another
Invesaro publishes investment theses with a hard publication date, an edge score and a basket return tracked against the market. Free and in public.
See our theses →