CAGR (Compound Annual Growth Rate) is one of the most useful metrics in finance because it turns messy growth across several years into a single annualized number. It answers: “If this grew at a steady rate, what rate would match the start and end?”
CAGR formula
Why CAGR beats average returns
Average returns can mislead when returns vary year to year. CAGR reflects compounding by linking beginning and ending values. It’s especially helpful for comparing investments with different time periods.
What CAGR hides
- Volatility: two investments can have the same CAGR but very different drawdowns.
- Cash flows: contributions/withdrawals change the story.
- Sequence risk: the path matters if you’re withdrawing.
Use CAGR to set return assumptions
When planning, a CAGR assumption can be plugged into the Compound Interest Calculator for a lump sum projection, or the SIP Calculator for recurring contributions.
Takeaway
CAGR is a powerful summary number for comparison and planning, but always pair it with an understanding of volatility and cash flows.
FAQ
Is CAGR the same as average return?
Can CAGR be negative?
Does CAGR account for contributions?
Why do two assets with same CAGR feel different?
How do I use CAGR in planning?
Next step
Use the calculators to model your scenario with consistent assumptions, then compare outcomes across time horizons and contribution plans.