CAGR (Compound Annual Growth Rate)

CAGR is the smooth yearly growth rate that would take an investment from its start value to its end value over a period.

How investors use it

When a fund claims an “average return,” ask for the CAGR instead. A simple average can look flattering after volatile years, while CAGR shows what you actually compounded to. Use the same time window when comparing two investments.

Worked example

A real-world scenario

A tech fund advertises a 15% average annual return over five years. The actual path was +40%, −10%, +30%, −25%, +45%. The simple average is about 16%, but the compounded reality is different: $10,000 grows to about $18,400, a CAGR of roughly 13%. The gap between 16% and 13% is the volatility drag. When an advisor quotes averages, ask what the money actually became — the CAGR — because that is the number that matches your bank balance.

Common confusion

CAGR hides volatility. Two investments with the same CAGR can feel very different along the way.

Why it matters

It removes the ups and downs so you can compare growth across investments on equal terms.

Key takeaway

CAGR is the number that matches your bank balance, while an average return is the number that flatters the story. Whenever anyone quotes an investment’s performance, ask for the compounded figure over the actual holding period, not the arithmetic average of good and bad years. The gap between the two is the volatility drag, and it grows with every big swing. For comparing two investments, CAGR over the same window is the only fair yardstick.

Definitions reviewed by the Investing Glossary editorial team.