Use the Compound Annual Growth Rate (CAGR) Calculator to determine the smooth, consistent growth rate of an investment over a specified period, assuming the profits were reinvested. This metric is essential for comparing different investment opportunities.
Annualized Return (CAGR) Calculator
Calculated Compound Annual Growth Rate (CAGR):
Annualized Return (CAGR) Formula
$$ \text{CAGR} = \left( \frac{\text{Ending Value}}{\text{Beginning Value}} \right)^{\frac{1}{\text{Number of Years}}} – 1 $$
Formula Source: Investopedia – Compound Annual Growth Rate, The Balance – CAGR Calculation
Variables Explained
- Initial Investment Value: The monetary value of the investment at the start of the period.
- Final Investment Value: The monetary value of the investment at the end of the period, including any reinvested earnings.
- Number of Years (n): The total duration of the investment, expressed in years. This can be fractional (e.g., 3.5 years).
- CAGR (Result): The constant rate of return required for an investment to grow from its beginning balance to its ending balance, assuming the profits were reinvested.
What is Compound Annual Growth Rate (CAGR)?
The Compound Annual Growth Rate (CAGR) is one of the most accurate measures for evaluating the performance of an investment over multiple time periods. It represents the smooth, geometrically averaged rate of return that an investment earned over the defined period. Unlike simple arithmetic average return, CAGR accounts for the compounding effect, providing a more realistic and professional assessment of an asset’s growth trajectory.
Financial analysts and investors widely use CAGR to compare the performance of different assets, such as stocks, mutual funds, or portfolios. By normalizing the growth rate into a single, annual figure, it eliminates the volatility that might occur year-to-year, making comparisons clean and actionable. For example, comparing a 5-year CAGR across two different funds gives a much better picture than comparing a single year’s return.
How to Calculate Annualized Return (Example)
Let’s calculate the CAGR for an investment that grew from an initial value of $10,000 to a final value of $18,000 over 5 years.
- Find the Growth Factor: Divide the Final Value by the Initial Value. $18,000 / $10,000 = 1.8$
- Determine the Exponent: Calculate the reciprocal of the number of years. $1 / 5 = 0.2$
- Apply the Power Function: Raise the Growth Factor to the power of the Exponent. $1.8^{0.2} \approx 1.1246$
- Subtract One: Subtract 1 from the result to find the growth rate. $1.1246 – 1 = 0.1246$
- Convert to Percentage: Multiply by 100 to express the CAGR as a percentage. $0.1246 \times 100 = 12.46\%$
Related Calculators
Frequently Asked Questions (FAQ)
What is a “good” Compound Annual Growth Rate (CAGR)?
A “good” CAGR is highly dependent on the asset class and market conditions. For general stock market investments (like the S\&P 500), a long-term average CAGR of 8-10% is often considered strong. However, high-risk investments, like early-stage startups, would typically be expected to target much higher CAGRs.
Is CAGR the same as Average Annual Return?
No. Average Annual Return is the arithmetic mean of a series of annual returns, which does not account for compounding. CAGR is the geometric mean, which accounts for the compounding effect of gains (or losses) and is a more accurate measure of performance over time.
What happens if the Final Value is less than the Initial Value?
If the Final Value is less than the Initial Value, the calculated CAGR will be negative. This indicates that the investment has lost value over the period. The calculator can handle negative growth rates correctly.
Why is the Number of Years important?
The Number of Years (n) is crucial because it dictates the time horizon over which the growth is annualized. A small difference in the number of years can significantly impact the CAGR result, as the growth is averaged across that entire duration.