Annualized Rate of Return (CAGR) Calculator
Measure your investment growth over time.
Your Annualized Rate of Return (CAGR) is:
0%
What is the Annualized Rate of Return?
The Annualized Rate of Return, often referred to as the Compounded Annual Growth Rate (CAGR), provides the geometric progression ratio that provides a constant rate of return over a specific time period. Unlike simple average returns, the annualized return accounts for the effects of compounding, providing a much more accurate picture of investment performance.
The CAGR Formula
To calculate the annualized return, we use the following mathematical formula:
CAGR = [(Ending Value / Beginning Value)(1 / Number of Years) – 1] * 100
Why Use Annualized Returns Over Absolute Returns?
Absolute returns tell you how much you made in total, but they ignore time. For example, a 50% return is impressive if it takes 2 years, but less so if it takes 20 years. The annualized return allows you to compare different assets (like stocks, real estate, or bonds) on an "apples-to-apples" basis by normalizing the growth to a 12-month period.
Practical Example:
Suppose you invested $10,000 in a mutual fund. After 5 years, your account balance is $16,105.
1. Total Return = 61.05%
2. Annualized Return calculation: [($16,105 / $10,000)(1/5) – 1]
3. Result: 10% per year.
Suppose you invested $10,000 in a mutual fund. After 5 years, your account balance is $16,105.
1. Total Return = 61.05%
2. Annualized Return calculation: [($16,105 / $10,000)(1/5) – 1]
3. Result: 10% per year.
Key Benefits of This Calculation
- Volatility Smoothing: It ignores year-to-year fluctuations and focuses on the steady growth rate.
- Benchmarking: Allows you to compare your portfolio performance against benchmarks like the S&P 500.
- Goal Setting: Helps determine if your current growth rate will meet your long-term retirement goals.