Calculate the Compound Annual Growth Rate of an investment.
CAGR = (Ending value / Beginning value)1/years − 1.
Compound Annual Growth Rate smooths a multi-year, often bumpy investment journey into a single steady annual rate that would have produced the same start-to-end result. That smoothing is exactly what makes CAGR more reliable than a simple arithmetic average of yearly returns — and also exactly where people get misled if they don't understand the difference. A classic illustration: an investment that falls 50% in year one and then gains 100% in year two has an arithmetic average return of +25% ((-50 + 100) / 2), yet the investor's actual money went from $100 to $50 and back to exactly $100 — a real return of 0%. CAGR correctly reports 0% for that journey; the simple average of +25% is mathematically true but practically meaningless.
A less extreme but very common version: a volatile investment returning +40%, -30%, +50% and -20% across four years has an arithmetic average of +10% a year — which sounds strong — but a lump sum invested at the start of that period would actually compound to a CAGR of only about 4.1%. The wider the swings, the bigger this gap gets, since arithmetic averaging ignores compounding order entirely while CAGR is built directly from the actual start and end values. This is also why CAGR is the right tool for a single lump-sum investment held over a period with no additions or withdrawals — but the wrong tool the moment money goes in or out partway through, such as a SIP or a series of partial withdrawals, where XIRR (Extended Internal Rate of Return) is the correct metric instead, because XIRR is built to handle exactly that kind of irregular cash flow timing.
Simple averaging (arithmetic mean) ignores the order and compounding effect of returns, while CAGR is calculated directly from the actual starting and ending values. A portfolio that loses 50% then gains 100% has a +25% arithmetic average but a 0% CAGR — because it genuinely ended up back where it started. CAGR reflects what actually happened to your money; the arithmetic average often doesn't.
No — CAGR only looks at the starting and ending values, so it smooths out everything that happened in between. Two investments can have an identical CAGR while one had a smooth, steady climb and the other had wild swings and deep drawdowns. CAGR should be paired with a volatility or drawdown measure, not used alone, when comparing how risky two investments were.
Use CAGR for a single lump-sum investment held from a start date to an end date with no additional deposits or withdrawals in between. Use XIRR the moment money moves in or out at multiple points in time — a SIP, a series of top-ups, or partial withdrawals — since XIRR is specifically built to handle irregular cash flow timing, while applying CAGR to that scenario produces a misleading number.
Not necessarily on its own — CAGR should always be compared against the level of risk taken to achieve it, and against relevant benchmarks or inflation. A high CAGR achieved through a handful of extremely volatile years may represent a very different risk profile than the same CAGR achieved through steady, consistent growth, even though both numbers look identical on paper.