CAGR Calculator

CAGR (Compound Annual Growth Rate) represents the rate at which an investment would have grown if it had grown at a steady rate over a specified period. The formula is (Ending Value/Beginning Value)^(1/Years) - 1. For example, if $10,000 grows to $20,000 in 5 years, the CAGR is 14.87%. Unlike simple average returns, CAGR accounts for compounding, providing the true growth rate. It is particularly useful for volatile investments, as it smooths out year-to-year fluctuations to show a consistent growth rate over the entire period. CAGR is essential for comparing different investments, evaluating performance across varying time periods, and projecting future values. It is one of the most widely used performance metrics in the investment industry because it accurately represents what an investor actually experiences.

CAGR is an essential tool for long-term investment analysis. Over periods of 10+ years, simple average returns can be misleading. For instance, a 50% gain in year one followed by a -30% loss in year two has a simple average of 10%, but the actual CAGR is only about 2.2%. CAGR shows how wealth truly compounds over time. When planning long-term investments, use CAGR to set retirement goals and financial targets. Historically, the S&P 500 has delivered approximately 10% CAGR, which serves as a benchmark for long-term equity investments. To understand the power of compounding, use the Rule of 72: divide 72 by your CAGR to find how many years it takes to double your money. A 10% CAGR doubles your investment in about 7.2 years. For retirement planning spanning 30-40 years, even small differences in CAGR (8% vs 10%) result in dramatically different outcomes—potentially millions of dollars in difference.

Compound growth is what Einstein allegedly called "the eighth wonder of the world." Simple interest earns returns only on principal, but compound interest earns returns on both principal and accumulated interest. $10,000 invested at 10% compound interest for 30 years grows to $174,494, while simple interest yields only $40,000. CAGR captures this compounding effect by reflecting how returns build upon returns year after year. Small differences in CAGR create massive differences over time. An 8% vs 10% CAGR results in over twice the wealth after 30 years. To maximize compounding: start investing early, reinvest dividends, minimize fees, and hold for long periods. Time is the critical factor—the longer you compound, the more dramatic the effect. A person investing $500/month from age 25 to 65 at 8% CAGR accumulates $1.75 million, while someone starting at 35 accumulates only $745,000—less than half, despite investing only 10 fewer years.

Understanding the difference between CAGR and simple average returns is crucial. Simple average adds up annual returns and divides by the number of years. For example, returns of 20%, -10%, and 30% average to 13.3%. However, CAGR accounts for actual compounding and would be approximately 11.8% in this case. The more volatile the returns, the greater the gap between these metrics. In an extreme example, a 100% gain followed by a -50% loss has an average return of 25% but a CAGR of 0% (you end up back at your starting point). CAGR is more accurate because it represents what an investor actually experiences. When comparing investment products, always use CAGR rather than average returns. Simple averages ignore volatility and can be misleading. Professional investors and institutions use CAGR as the standard for performance reporting. Fund prospectuses are required to show CAGR over various periods (1, 5, 10 years) precisely because it provides the most accurate picture of investment performance.

Benchmarking is the essential process of evaluating investment performance. Compare your portfolio's CAGR against appropriate benchmarks. For U.S. stock investors, the S&P 500 (historical CAGR ~10%) is standard. International stocks use MSCI World Index. Bonds compare to aggregate bond indices. Mixed portfolios benchmark against 60/40 portfolios (60% stocks, 40% bonds) which historically deliver 7-8% CAGR. Consistently beating benchmarks is extremely difficult. Research shows over 80% of actively managed funds underperform their benchmarks over 10-year periods. If your CAGR trails the benchmark, consider switching to low-cost index funds. Even if you beat the benchmark, check risk-adjusted returns (Sharpe ratio)—higher returns may come with excessive risk. Use sector-specific benchmarks when appropriate: tech stocks vs NASDAQ, real estate vs REIT indices. Regular benchmarking provides objective feedback on whether your investment strategy is working. It removes emotion and anchoring bias, helping you make rational decisions about continuing, modifying, or abandoning investment approaches.

CAGR informs various investment decisions. Goal setting: If you need $500,000 in 10 years and have $200,000 now, you need a 9.6% CAGR. Comparing investments: A 50% return over 3 years (CAGR 14.5%) beats a 30% return over 2 years (CAGR 14.0%). Projecting future value: $100,000 at 8% CAGR for 20 years grows to approximately $466,096. Required savings calculation: Knowing target CAGR and time period, you can work backward to determine annual contributions needed. Retirement planning: Input current assets, expected CAGR, and years to retirement to estimate retirement portfolio value. When assessing risk, remember higher CAGR usually comes with higher volatility. Set realistic CAGR expectations: stocks 8-12%, bonds 3-5%, cash 1-2%. Overly optimistic CAGR assumptions lead to inadequate savings and retirement shortfalls. Use CAGR sensitivity analysis—model outcomes at various CAGRs (conservative, moderate, aggressive) to understand the range of possibilities. This prevents overconfidence and ensures your financial plan remains robust even if returns disappoint.