What is CAGR?
The compound annual growth rate (CAGR) is the steady yearly return that would take an investment from its starting value to its ending value over a number of years:
CAGR = (ending value ÷ starting value)1 ÷ years − 1
For example, $10,000 that grows to $18,000 in 5 years has a CAGR of about 12.5% a year, even if some years were up and others down.
Simple average vs. compound average
If you enter a list of yearly returns, the calculator shows both averages:
- Simple (arithmetic) average – adds the returns and divides by the number of years.
- Compound (geometric) average – the return you actually earned per year. It is always equal to or lower than the simple average when returns vary.
The gap matters: a 50% loss followed by a 50% gain has a simple average of 0%, but $100 becomes $50 and then $75, a real loss of 25%.
Frequently asked questions
Which average should I use to compare funds?
Use the compound average or CAGR. Fund companies report annualized returns this way for 1, 5 and 10-year periods.
Does CAGR include dividends?
Only if your ending value includes them. Use total return, with dividends reinvested, for a fair comparison.
What if I added money along the way?
Deposits and withdrawals distort CAGR. Use the IRR calculator, which accounts for the timing of each cash flow.