What Is CAGR and Why It Matters for Investors
CAGR smooths out year-to-year volatility to show the true annualized growth rate of an investment.
Compound Annual Growth Rate (CAGR) measures the annualized rate at which an investment would have grown if it grew at a steady rate every year — even though real returns are rarely smooth from year to year.
The CAGR formula
CAGR = (Ending Value / Beginning Value)1/n − 1, where n is the number of years.
CAGR compresses a volatile, multi-year return series into a single, comparable annual growth figure — which is why it's widely used to compare mutual funds, stocks and business performance over time.
CAGR vs. average annual return
A simple average of yearly returns can be misleading because it ignores compounding and can overstate performance when returns are volatile. CAGR, by contrast, reflects the actual compounded growth path from the starting value to the ending value, making it a more honest measure of long-term performance.
Limitations of CAGR
CAGR assumes smooth, consistent growth — it hides the volatility an investor actually experienced along the way. Two investments with the same CAGR can have very different risk profiles. Always look at CAGR alongside volatility and drawdown when evaluating an investment.