CAGR: the annualized rate that makes returns comparable
A total return by itself doesn't say how good an investment was — a 60% gain over 3 years and a 60% gain over 6 years are very different results, and CAGR is the one number that puts them on the same footing.
The formula
CAGR = ((end ÷ start)(1 ÷ years) − 1) × 100. It answers: what single steady annual rate, compounded every year, would have taken the start value to the end value over that many years? Unlike total return, it already accounts for how long the money was working.
A real example: $1,000 growing to $2,500 over 5 years
A portfolio starts at $1,000 and ends at $2,500 five years later.
- Growth ratio:
2,500 ÷ 1,000 = 2.5. - CAGR:
2.5(1/5) − 1 ≈ 0.2011, or ≈20.11% a year.
A 150% total gain (from $1,000 to $2,500) compounds down to a steady annual rate just over 20% — that's the number to compare against a savings account APR or another investment's own CAGR.
A real example: the same total return, twice the time
Two versions of the same $10,000-to-$16,000 investment — a 60% total return either way — but one takes 3 years and the other takes 6.
- Over 3 years:
1.6(1/3) − 1 ≈ 0.1696, or ≈16.96% a year. - Over 6 years:
1.6(1/6) − 1 ≈ 0.0815, or ≈8.15% a year.
Same 60% headline return, but doubling the time it took to get there roughly halves the annualized rate — from 16.96% down to 8.15%. Total return alone hides how much of the credit belongs to time rather than performance.
A real example: the bigger headline number isn't always the better one
Compare two real outcomes: $5,000 growing to $9,000 over 4 years, versus $5,000 growing to $8,000 over just 2 years.
- $5,000 to $9,000 in 4 years: total return 80%, CAGR
1.8(1/4) − 1 ≈ 0.1583, or ≈15.83% a year. - $5,000 to $8,000 in 2 years: total return 60%, CAGR
1.6(1/2) − 1 ≈ 0.2649, or ≈26.49% a year.
The 80% total return looks like the better result on paper, but it took twice as long to get there. Annualized, the 60%-return investment actually performed better — 26.49% a year against 15.83% — exactly the comparison total return alone can't make.
What this doesn't capture
CAGR assumes smooth, steady compounding; it erases the bumpy path an investment actually took between the start and end values, so two investments with identical CAGRs can have had very different volatility along the way. It also doesn't account for money added or withdrawn mid-period — it's built for a single start value and a single end value only.
Run your own numbers
The free CAGR calculator runs this instantly for your own start value, end value and years — entirely on your device.