CAGR Calculator – Compound Annual Growth Rate Analysis
Calculate compound annual growth rate for investments and track returns over time
How to Use
- Enter the beginning value of your investment
- Input the ending value of your investment
- Specify the number of years between the beginning and ending values
- Click calculate to see your CAGR percentage and total returns
- Use the results to compare different investment opportunities
What is CAGR?
Compound Annual Growth Rate (CAGR) is the rate of return that would be required for an investment to grow from its beginning balance to its ending balance, assuming profits were reinvested at the end of each period. CAGR smooths out returns and provides a consistent annual growth rate over time, making it ideal for comparing investment performance.
Unlike simple average returns, CAGR accounts for the effects of compounding, giving a more accurate picture of actual investment performance. It's particularly useful when comparing investments with different time periods or when returns vary significantly from year to year.
How CAGR is Calculated
The CAGR formula is: CAGR = (Ending Value / Beginning Value)^(1 / Number of Years) - 1
For example, if you invested $10,000 and it grew to $15,000 over 5 years, the CAGR would be: (15,000 / 10,000)^(1/5) - 1 = 8.45% per year.
When to Use CAGR
Limitations of CAGR
While CAGR is a useful metric, it has some important limitations. CAGR assumes smooth, steady growth and doesn't account for volatility or risk. Two investments with the same CAGR can have very different risk profiles. CAGR also doesn't reflect timing of cash flows or additional contributions during the investment period.
For investments with regular contributions or withdrawals, other metrics like Internal Rate of Return (IRR) or Time-Weighted Return may be more appropriate. CAGR is best used alongside other performance metrics for a complete investment analysis.
Frequently Asked Questions
- What is a good CAGR for investments?
- A 'good' CAGR depends on the investment type and risk level. The S&P 500 has historically averaged around 10% CAGR. Conservative investments might see 4-6% CAGR, while aggressive growth investments could target 12-15% or higher. Always consider CAGR in context with risk and volatility.
- How is CAGR different from average annual return?
- CAGR accounts for compounding and provides the geometric growth rate, while average annual return is simply the arithmetic mean of returns. CAGR is typically lower and more accurate for long-term performance because it reflects the actual path of investment growth.
- Can CAGR be negative?
- Yes, CAGR can be negative if the ending value is lower than the beginning value, indicating the investment has declined in value over the period. A negative CAGR represents the annualized rate of decline.
- Is CAGR the same as IRR?
- No, CAGR and IRR are different. CAGR only considers beginning and ending values with a single lump sum investment. IRR accounts for the timing and size of all cash flows during the investment period, making it more comprehensive but also more complex to calculate.
- How do I use CAGR for financial planning?
- Use CAGR to project future investment values, set realistic growth expectations, compare different investment options, and track whether your portfolio is meeting your long-term financial goals. Remember to consider inflation when using CAGR for long-term planning.