CAGR Calculator
Calculate the Compound Annual Growth Rate (CAGR) to measure the mean annual growth rate of an investment over a specified time period.
Calculator Inputs
The initial value of your investment
The final value of your investment
The time period over which the investment grew
Results
14.87%
Average annual growth rate over 5 years
$10,000.00
100.00% total return
$2,000.00
Average amount gained per year
Investment Value Over Time
Year-over-Year Growth Rate
When looking at investments, it is necessary to have a means of comparing returns over different timeframes and types of investments. CAGR is the solution to that problem. One of the best and most correct ways to figure out and specify the returns of any thing that could go up or down in value over a period of time is the Compound Annual Growth Rate (CAGR).
Whereas a simple average of returns does not take into account, CAGR is a measure that considers the compounding effect - the feature by which your returns make additional returns over time. It removes the ups and downs and provides you with one single consistent annual growth rate that would have taken you from your initial value to your final value.
In fact, CAGR is a universal standard for comparing the performance of different entities or projects that are looking at the same metric but over different time periods. Hence, it becomes a very powerful tool when we have to compare the performance of a stock, a mutual fund, or a business over different time frames and/or when the returns or profits have been fluctuating.
How CAGR Works
CAGR is a measure which basically figures out the average annual growth of an investment over a certain time period. The computation definitely implies that the investment increase is stable for every year, while in reality the growth can be quite volatile. So it essentially gives you a view of the performance which is smoothed out.
The CAGR formula is:
CAGR = ((Ending Value / Beginning Value)^(1/Years)) - 1As an illustration, in case you put $10,000 to work and after 5 years it came to be $20,000, your CAGR would be around 14.87%. The implication of this is your investment grew at an average rate of 14.87% per year while there might still have been some years with 20% increase and others with 5% decrease.
Why CAGR is Important
- 1.Standardized Comparison: CAGR allows you to put side by side investments over different time periods and still come to a fair conclusion. Through CAGR a 10% return over 3 years can be compared to a 12% return over 5 years in a direct manner.
- 2.Smooths Volatility: Real investments have ups and downs. CAGR smooths out these fluctuations to show you the underlying growth trend, making it easier to understand long-term performance.
- 3.Accounts for Compounding: Unlike simple averages, CAGR recognizes that returns compound over time. This gives you a more accurate picture of how your money actually grew.
- 4.Forward Planning: You can project future values of an investment once you are aware of its CAGR. In case an investment has a 10% CAGR, you can calculate what its value would be after 10 years.
- 5.Performance Benchmarking: CAGR helps you evaluate whether an investment met your expectations or outperformed market benchmarks like the S&P 500.
CAGR vs Other Return Metrics
CAGR differs from other ways of measuring returns:
- Simple Average Return: This simply averages the returns for each year. For example, if your returns were +20%, -10%, and +15%, the simple average would be 8.33%. However, CAGR is a measure that takes into account the compounding effect, so it would be a different value.
- Total Return: This displays the total percentage increase without considering the time period. A 100% return in 2 years is quite different from 100% in 10 years - CAGR illustrates this difference.
- Annualized Return: This indicates the overall percentage change of the value disregarding the time span. A 100% return in 2 years is very different from 100% in 10 years CAGR shows this difference.
Limitations of CAGR
While CAGR is a valuable metric, it has some limitations:
- Assumes Steady Growth: CAGR assumes the investment grew at a constant rate, which rarely happens in reality. It smooths out volatility, which can hide periods of significant risk.
- Doesn't Show Volatility: Two investments with the same CAGR might have very different risk profiles. One might have been steady, while the other had huge swings.
- Time Period Matters: CAGR can vary significantly depending on which start and end dates you choose. A 5-year CAGR might look very different from a 10-year CAGR for the same investment.
- No Cash Flows: CAGR only looks at beginning and ending values. It doesn't account for additional investments or withdrawals made during the period.
Despite these limitations, CAGR remains one of the best tools for comparing investment performance, especially when used alongside other metrics like volatility, maximum drawdown, and risk-adjusted returns.
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