Compound Annual Growth Rate (CAGR) Calculator

Measure the annual growth rate of your investments over time, taking into account the compounding effect.

Calculate Your Investment's CAGR

Understanding CAGR (Compound Annual Growth Rate)

What is CAGR?

Compound Annual Growth Rate (CAGR) is a measurement of the annual growth rate of an investment over a specified time period longer than one year. It represents the steady rate at which an investment would have grown if it grew at the same rate each year.

Unlike simple annual growth rates, CAGR takes into account the effect of compounding, making it a more accurate representation of an investment's performance over time.

How CAGR Works

CAGR = (Final Value / Initial Value)^(1/n) - 1

Where n is the number of years

For example, if you invested $10,000 and it grew to $15,000 over 5 years, the CAGR would be:

CAGR = ($15,000 / $10,000)^(1/5) - 1 = 8.45%

This means your investment grew at an average rate of 8.45% per year over the 5-year period.

Uses of CAGR

  • Comparing Investments: CAGR provides a standardized growth rate that helps compare investments with different time periods.
  • Smoothing Out Volatility: It smooths out the fluctuations in growth over the investment period, showing the "steady" growth rate.
  • Measuring Performance: It helps assess how well an investment has performed over time compared to benchmarks or other investment options.
  • Future Projections: It can be used to estimate future values of an investment if the same growth rate continues.

Limitations of CAGR

  • No Volatility Indication: CAGR does not show the ups and downs experienced during the investment period.
  • Past Performance: It represents historical growth and does not guarantee future performance.
  • No Insight into Investment Risk: It does not provide any information about the risk associated with the investment.

When to Use CAGR

CAGR is most useful when:

  • Comparing the performance of different investments over time
  • Evaluating an investment's long-term performance (typically 3+ years)
  • Analyzing business growth trends
  • Planning for long-term financial goals

CAGR vs. Simple Annual Return

While simple annual return calculates the average of yearly returns, CAGR provides the geometric mean of annual returns, accounting for compounding effects.

Example:

An investment grows from $10,000 to $13,000 in year 1 (30% growth), then falls to $11,000 in year 2 (15.4% decline).

  • Simple Average Return: (30% + (-15.4%)) / 2 = 7.3%
  • CAGR: ($11,000 / $10,000)^(1/2) - 1 = 4.88%

CAGR gives a more accurate picture of the actual growth rate experienced.

Benefits of Using Our CAGR Calculator

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Investment Insights

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Frequently Asked Questions

What is a good CAGR percentage?

A "good" CAGR depends on the investment type, risk level, and market conditions. Generally, a CAGR of 7-10% is considered good for long-term stock investments. Government bonds might have 2-5% CAGR, while high-growth investments might exceed 15%. Compare your CAGR to relevant benchmarks for your investment type.

Can CAGR be negative?

Yes, CAGR can be negative if the final value of your investment is less than the initial value. A negative CAGR indicates that your investment has decreased in value over the period.

How is CAGR different from IRR (Internal Rate of Return)?

CAGR measures the growth rate of a single investment over time, while IRR calculates the rate at which the net present value of all cash flows equals zero. IRR accounts for multiple cash flows, making it suitable for complex investments with multiple inflows and outflows.

Can CAGR be used for short-term investments?

While CAGR can be calculated for any time period, it's most useful for investments with a duration of 3 years or longer. For shorter periods, simple annual return might be more appropriate as CAGR smooths out volatility, which could be important to understand in short-term investments.

Does CAGR account for additional investments or withdrawals?

No, the basic CAGR formula assumes a single initial investment and a final value without any additional contributions or withdrawals. For investments with multiple cash flows, other metrics like Money-Weighted Rate of Return (MWRR) or Internal Rate of Return (IRR) are more appropriate.

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