Compound Annual Growth Rate (CAGR) Calculator
Calculate the compound annual growth rate of your investment over a specific period.
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Understanding CAGR in Depth
What is Compound Annual Growth Rate?
The Compound Annual Growth Rate (CAGR) is one of the most accurate ways to calculate and determine returns for anything that can rise or fall in value over time. It represents the rate at which an investment would have grown if it had grown at the same rate every year and the profits were reinvested at the end of each year.
Key Benefits of Using CAGR
1. Accurate Measurement of Returns
CAGR provides a more accurate picture of an investment's performance by accounting for the effect of compounding, which simple average returns do not.
2. Easy Comparison Between Investments
CAGR allows investors to compare the performance of different investments over the same time period, regardless of their volatility.
3. Forecasting Future Value
Investors can use historical CAGR to make projections about the potential future value of an investment if similar conditions persist.
Applications of CAGR
CAGR is widely used across various financial contexts:
- Stock Performance: Measure how well a stock has performed over multiple years.
- Portfolio Evaluation: Compare the performance of different investment portfolios.
- Mutual Fund Analysis: Evaluate the historical performance of mutual funds.
- Business Metrics: Track company growth in terms of revenue, profit, market share, etc.
- Industry Analysis: Compare growth rates across different industries or sectors.
- Economic Indicators: Analyze the growth rate of economic measures like GDP, inflation, etc.
Limitations of CAGR
While CAGR is a powerful metric, it's important to understand its limitations:
Smooths Over Volatility
CAGR ignores the volatility or fluctuations during the investment period. Two investments with identical CAGRs might have very different risk profiles.
Assumes Steady Growth
CAGR assumes a constant growth rate over the entire period, which is rarely the case in real-world scenarios where investments experience varying levels of growth.
Doesn't Account for Additional Investments
CAGR doesn't account for cash inflows or outflows during the investment period, which can significantly impact actual returns.
Past Performance ≠ Future Results
Historical CAGR is no guarantee of future performance. Market conditions, company circumstances, and economic factors can all change.
CAGR vs. Other Metrics
| Metric | Description | When to Use |
|---|---|---|
| CAGR | Measures smoothed annual growth rate over multiple periods | When comparing investments over identical time periods |
| IRR (Internal Rate of Return) | Calculates return with multiple cash flows | When evaluating projects with irregular cash flows |
| AAGR (Average Annual Growth Rate) | Simple average of annual returns | For quick estimations (less accurate than CAGR) |
| ROI (Return on Investment) | Measures total return relative to investment cost | For evaluating overall profitability without time factor |
What Makes a Good CAGR?
What constitutes a "good" CAGR depends on various factors:
Market Context
A good CAGR should be evaluated relative to market benchmarks and indices. For example, if the S&P 500 has a 10-year CAGR of 8%, an investment with a 10% CAGR would be considered above average.
Industry Standards
Different industries have different growth expectations. Mature industries might have lower CAGRs (3-5%), while emerging technologies might see much higher rates (15-30% or more).
Risk Tolerance
Higher CAGRs often come with higher risk. A more conservative investor might be satisfied with a lower but steadier CAGR.
Real-World CAGR Examples
To put CAGR in perspective, here are some historical examples:
S&P 500 (1957-2023)
The S&P 500 has delivered a CAGR of approximately 10.2% (including dividend reinvestment) from its inception in 1957 through 2023.
Technology Sector Growth
The technology sector has shown CAGRs ranging from 15% to over 20% during various growth periods, such as the 2010-2020 decade.
Real Estate Investment
U.S. residential real estate has shown a national average CAGR of around 3.5-4% over long periods, though this varies significantly by location.
- The length of the time period (longer periods generally provide more reliable insights)
- The context of the broader market during that period
- Additional risk metrics like standard deviation
- Whether the investment required additional contributions
CAGR Formula
The 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 the profits were reinvested at the end of each year.
Where:
- Ending Value = The final value of the investment
- Beginning Value = The initial value of the investment
- n = Number of years
How to Calculate CAGR
To calculate CAGR, follow these steps:
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1Determine the beginning value of your investment
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2Determine the ending value of your investment
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3Determine the number of years
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4Divide the ending value by the beginning value
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5Raise the result to the power of 1/n
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6Subtract 1 from the result
Interpreting CAGR Results
Positive CAGR
Indicates that your investment has grown over the period. The higher the CAGR, the better the investment performance.
Negative CAGR
Indicates that your investment has decreased over the period. The more negative the CAGR, the worse the investment performance.
Zero CAGR
Indicates that your investment has neither grown nor decreased over the period.
CAGR - Practical Examples
Example 1 Basic Investment
Beginning Value: $10,000
Ending Value: $15,000
Years: 5
CAGR = ($15,000 / $10,000)^(1/5) - 1 = 8.45%
Example 2 Long-term Investment
Beginning Value: $5,000
Ending Value: $20,000
Years: 10
CAGR = ($20,000 / $5,000)^(1/10) - 1 = 14.87%