CAGR (Compound Annual Growth Rate)

How it's calculated

CAGR = (Ending Value / Starting Value)^(1/years) − 1

A $10,000 investment that grows to $25,000 over 8 years has a CAGR of (25,000 / 10,000)^(1/8) − 1 = 1.1213 − 1 = 12.13%. The investment effectively grew at 12.13% per year, compounded.

CAGR is the geometric average of annual returns — it accounts for compounding, unlike a simple arithmetic average. Two investments can have the same arithmetic average return but very different CAGRs:

• Investment A: +50%, then -50% → arithmetic average 0%, but CAGR ≈ -13.4% (you end with $0.75 per starting dollar)
• Investment B: +10% each year for two years → arithmetic average 10%, CAGR 10%

The arithmetic average is often misleading; CAGR tells you what actually happened to the dollar.

When to use CAGR

CAGR is the standard return measure when:

• Comparing investment performance across different time periods.
• Quoting annualized returns on investments held for more than a year.
• Showing the smoothed long-run behavior of a portfolio or business metric.
• Forecasting future value at an assumed compound rate.

It's most useful for end-to-end comparisons — what was the experience of someone who invested at time A and held to time B?

Limitations

A few common misuses:

• CAGR hides volatility. A 10% CAGR can come from a smooth ride or from a wild path. A bond fund and a Bitcoin position might have the same CAGR over a decade with completely different drawdown profiles. The Sharpe ratio and other risk-adjusted measures complement CAGR.
• Sensitive to start and end points. A CAGR computed from a market low to a market high is artificially high; from a peak to a trough, artificially low. Cherry-picking windows is a common abuse in marketing materials.
• Doesn't reflect actual cash flows. If you added or withdrew money during the period, CAGR on the raw dollar values misrepresents your actual experience. Internal rate of return (IRR) handles this case better.

CAGR vs. IRR

IRR is the more general version. CAGR assumes a single starting investment and a single ending value with no flows in between; IRR handles arbitrary cash flows in and out of a position. For most simple cases (buy once, hold, look at value years later), CAGR is what you want and IRR reduces to CAGR. For complex cases (regular contributions, partial withdrawals, irregular timing), IRR is the correct calculation.

Common reference points

A few useful CAGR figures to anchor expectations:

• US large-cap stocks since 1928: ~10% nominal CAGR, ~7% real after inflation.
• Long Treasury bonds since 1928: ~5% nominal, ~2% real.
• 60/40 portfolio: ~8% nominal historically, lower in low-rate periods.
• Bitcoin since 2010: ~150%+ CAGR but with extreme volatility and reliance on early prices that are no longer relevant. CAGR over the last 5-10 years is meaningfully lower.

When someone quotes a CAGR, the relevant follow-up question is always "over what period and starting from where?"