CAGR (Compound Annual Growth Rate)
CAGR is the smoothed, constant annual growth rate that would take an investment from its starting value to its ending value over a given period, assuming steady compounding. It's not the actual return in any single year — it's a simplified average.
Why it matters
- CAGR makes it easy to compare investments that grew over different time periods or with very different year-to-year volatility.
- It smooths out the ups and downs into one "as-if-steady" number, which is useful for comparison but can hide how bumpy the actual ride was.
- CAGR is a nominal figure unless explicitly adjusted for inflation — see Real Return for the inflation-adjusted version.
Simple example
- An investment that grows from $10,000 to $19,672 over 10 years has a CAGR of about 7%, even if actual yearly returns varied widely.
- Two investments can have the same CAGR but very different risk — one might have grown steadily, the other through wild swings that happened to average out to the same result.