compound annual growth rate
The rate at which an investment would have grown if it grew at a steady rate annually — a smoothed measure of growth that accounts for compounding.
Example
“The S&P 500 had a compound annual growth rate of approximately 10% over the past century.”
Memory Tip
CAGR = if growth were perfectly steady, this is the annual rate. Smooths out year-to-year swings.
Why It Matters
Understanding compound annual growth rate helps you evaluate how well your investments have performed over time and compare different investment options fairly. It removes the noise of year-to-year volatility and shows you the true average annual return, which is essential for retirement planning and long-term wealth building.
Common Misconception
Many people think compound annual growth rate is the same as simply dividing total returns by the number of years, but this ignores the compounding effect where gains earn returns themselves. This misunderstanding can lead to underestimating how powerful long-term investing truly is.
In Practice
If you invested 10,000 dollars and it grew to 15,735 dollars over five years, the compound annual growth rate would be approximately 9.2 percent annually. This means your money grew at a steady 9.2 percent each year, accounting for the fact that your gains in earlier years also earned returns in later years, even though actual yearly returns varied.
Etymology
COMPOUND (reinvested) ANNUAL (per year) GROWTH RATE. The ANNUAL RATE of COMPOUNDING GROWTH.
Common Misspellings
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