Compound annual growth rate (CAGR)
The steady yearly growth rate that would take an investment from its starting value to its ending value over a given number of years.
What it means
CAGR smooths out the bumpy path of an investment into a single annual rate, as if it had grown by the same percentage every year. It accounts for compounding, so it is more accurate than simply dividing total growth by the number of years.
CAGR is useful for comparing investments or growth over different periods, but it hides volatility: two investments with the same CAGR could have had very different ups and downs. It also depends heavily on the start and end dates chosen, and a past CAGR says nothing certain about future growth. Deposits and withdrawals during the period distort it.
Formula
CAGR = (Ending value ÷ Beginning value)^(1 ÷ n) − 1
- Ending value = value at the end of the period
- Beginning value = value at the start
- n = number of years
Example
Suppose $10,000 grows to $16,000 over 5 years. CAGR = (16,000 ÷ 10,000)^(1 ÷ 5) − 1, or about 9.86% a year. Simply dividing the 60% total gain by 5 would overstate it at 12%.
How it’s used
- Comparing the historical performance of funds or portfolios
- Measuring growth in a home’s value or a business’s revenue
- Checking progress toward a long-term savings goal
Related terms
Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.