Compound annual growth rate (CAGR)

Before you rely on it

What to check

Read it alongside a drawdown figure. CAGR says where you ended, not what you sat through.

The common error

Where people go wrong with compound annual growth rate (CAGR)

Choosing between two funds on CAGR alone. The one with the smoother path is often the one an investor actually stays in long enough to collect the return.

Worked through

Compound annual growth rate (CAGR) in plain numbers

An investment grows from $10,000 to $18,000 in five years. The total gain is 80%. The CAGR is the constant yearly rate that gets you there: 1.8 raised to the power of one fifth, minus one. That is about 12.5%. Check it: $10,000 × 1.125⁵ is roughly $18,000. Now suppose the path was rough, with +40%, −20%, +30%, +5% and +18% along the way; the CAGR is the same 12.5% because it only uses the start and end values. Two very different journeys can share one CAGR, which is both its strength and its limit.

Easily confused

Compound annual growth rate (CAGR) and its neighbours

CAGR is not the average annual return. Averaging yearly percentages ignores compounding, so a +50% year followed by a −50% year averages to zero while the money has fallen by 25%. CAGR reports the smooth rate that connects the start and end, and it also differs from annualized return, which handles any period, and from IRR and money-weighted return, which handle deposits and withdrawals along the way. CAGR assumes no cash goes in or out between the two dates. If it does, use one of the cash-flow-aware measures.

In real decisions

Where compound annual growth rate (CAGR) turns up

Analysts quote CAGR for revenue, users, prices, population and investment values; it makes growth over different lengths of time comparable; a company might report five-year CAGR in sales next to its profit growth. Investors read fund fact sheets that show CAGR for one, three, five and ten years. Planners use it to project a value forward: $50,000 growing at a CAGR of 6% for twelve years reaches about $100,600. It is a clean way to describe a trend in one number.

Know the edges

Where compound annual growth rate (CAGR) stops being reliable

CAGR hides volatility and depends heavily on the endpoints. Start after a crash or end at a peak and the figure looks better than the experience of holding the asset; it says nothing about risk or the path. Negative or zero starting values break the formula. It is descriptive, not predictive: the past rate does not promise the next one. Report the period and the start and end dates whenever you quote it, and look at the yearly returns as well.

Quick answers

What people ask about compound annual growth rate (CAGR)

Can CAGR be negative? Yes. If the ending value is below the starting value, the smooth rate that connects them is negative. A fall from $100 to $64 in two years is a CAGR of −20%.

Why not just average the yearly growth rates? Averages ignore compounding. Growth of +50% then −50% averages to zero, yet you end 25% lower. CAGR reports the rate that matches the endpoints.