Guide · Concept

What is CAGR?

Last updated June 4, 2026 · ~5 min read

CAGR — compound annual growth rate — is the single most useful number for comparing investments held over different lengths of time. It answers one question: what steady yearly rate would have turned your starting amount into your ending amount?

The one-line definition

CAGR is the constant annual rate that takes a starting value to an ending value over some number of years, as if the investment had grown perfectly smoothly. The formula is simple:

CAGR = (End ÷ Start) ^ (1 ÷ years) − 1

It is a geometric average, not a simple one — which matters, because investment gains compound on top of each other rather than adding up in a straight line.

A quick example

Say $1,000 grew to $2,000 over 6 years. The temptation is to say 'it doubled, so that's 100% ÷ 6 ≈ 16.7% a year.' That is wrong. The correct figure is (2) ^ (1 ÷ 6) − 1 ≈ 12.2% a year.

The gap exists because each year's gain is earned on a larger base than the last. A simple average ignores that; CAGR captures it.

Why it beats raw 'total return'

A total return like '+1,542%' is eye-catching but almost useless for comparison: was that over two years or twelve? CAGR puts every result on a per-year footing, so a 5-year result and a 2-year result can be compared directly.

That is exactly why every scenario on this site reports CAGR alongside the headline total return — the two together tell a fuller story.

What CAGR hides

Because CAGR pretends growth was smooth, it quietly erases the path. A 60% CAGR can sit on top of a year where the investment fell 80% and then recovered. Two assets can share an identical CAGR while one was a calm grind upward and the other a terrifying rollercoaster.

So treat CAGR as half of the picture. Pair it with a measure of risk before you decide whether a return was actually worth living through.

FAQ

Is a higher CAGR always better?

No. A higher CAGR usually comes with bigger swings and deeper drawdowns. The right question is whether the extra return justified the extra risk — and whether you could have held on through the worst of it.

What counts as a 'good' CAGR?

There is no universal answer, but as a rough anchor, broad stock-market indices have historically returned somewhere around 7–10% a year (nominal) over the long run. Anything far above that typically carries far more risk.

Related: Maximum drawdown · Nominal vs. real return · CAGR in action: $1,000 in NVIDIA

This guide is educational and is not financial advice. See our terms & disclaimer.

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