What Is CAGR?
CAGR (Compound Annual Growth Rate) is the rate at which an investment grows from its starting value to its ending value, as if it grew at a steady rate each year. It smooths out year-to-year volatility into a single comparable number.
The formula: CAGR = (End Value / Start Value)1/years − 1. For example, if an investment grew from $10,000 to $25,000 over 10 years, CAGR = (25,000/10,000)1/10 − 1 = 9.6%.
CAGR is the standard metric for comparing investment performance across different time periods and asset classes. It's used by analysts, fund managers, and investors worldwide because it gives a clear, normalized picture of growth.
Frequently Asked Questions
What is a good CAGR for investments?
For stock market investments, 7–10% CAGR is historically solid (S&P 500 average). Venture capital typically targets 20–30%+ CAGR. Real estate averages 4–8%. For business revenue, 15–25% annual growth is considered strong. Higher CAGR almost always means higher risk.
What is the difference between CAGR and average annual return?
Average annual return is the arithmetic mean of yearly returns. CAGR is the geometric mean — it accounts for compounding and always equals the actual start-to-end growth rate. CAGR is lower than the simple average when there's volatility, which is why it's a more honest performance metric.
Can CAGR be negative?
Yes. If the ending value is less than the starting value, CAGR will be negative, indicating an annualized loss. For example, a $10,000 investment declining to $7,000 over 5 years has a CAGR of −6.9%.