investing

CAGR

Compound Annual Growth Rate — the rate at which an investment grows from beginning to end value, assuming profits are reinvested each year. A smoothed annual growth rate.

Example

“An investment that grew from $10,000 to $16,105 over 5 years had a CAGR of approximately 10%.”

Memory Tip

CAGR = the steady yearly growth rate that would get you from start to finish. Smooths out the bumps.

Why It Matters

CAGR helps you understand the true annual return on your investments in a way that accounts for compound growth over multiple years. This metric is essential for comparing different investments fairly and determining whether your portfolio is meeting your long-term financial goals.

Common Misconception

Many people think CAGR shows the actual return each year, but it is a smoothed average rate that may not reflect the actual ups and downs experienced annually. Your investment might grow 50 percent one year and lose 10 percent the next, yet still have a specific CAGR when calculated from start to finish.

In Practice

If you invested 10,000 dollars in a stock fund that grew to 15,000 dollars over 5 years, your CAGR would be approximately 8.4 percent per year. This means that if your investment had grown at a steady 8.4 percent annually with reinvested profits, you would reach that same 15,000 dollar ending value.

Etymology

Acronym for Compound Annual Growth Rate. COMPOUND (reinvested) ANNUAL (per year) GROWTH RATE.

Common Misspellings

C.A.G.R.cagr.CAGR.

Related Terms

compound interest Rule of 72

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