CAGR measures the annualized rate of return over a period, assuming profits are reinvested. It smooths out volatility to show the steady growth rate.
An investment grows from $10,000 to $25,000 over 5 years. CAGR = (25000/10000)^(1/5) - 1 = 20.11% per year.
CAGR is best for comparing investments over different time periods. A 10-year CAGR of 12% means the investment grew at 12% per year on average, compounded.
Absolute return is the simple total gain: ending value minus beginning value. A $1,000 investment growing to $1,500 has an absolute return of 50%. But 50% over 1 year is excellent, while 50% over 10 years is mediocre. CAGR solves this by annualizing returns.
$1,000 → $1,500 over 3 years: Absolute return = 50%, CAGR = 14.47%
$1,000 → $1,500 over 10 years: Absolute return = 50%, CAGR = 4.14%
Same absolute return, vastly different annualized performance. Always use CAGR when comparing investments held for different periods.
Two investments both achieve 15% CAGR over 5 years, but their paths are very different:
Same CAGR, vastly different experience. Investment A lets you sleep at night; Investment B might cause you to panic-sell. This is why CAGR should always be paired with volatility measures like standard deviation.
Compare to benchmarks: Always compare your portfolio's CAGR to a relevant benchmark. The S&P 500 has historically returned ~10% CAGR. A portfolio achieving 12% CAGR with similar risk is excellent; achieving 12% with triple the volatility is less impressive.
Use CAGR alongside standard deviation: A 15% CAGR with 8% standard deviation is far superior to 15% CAGR with 25% standard deviation. The Sharpe ratio (CAGR ÷ volatility) gives you a single number for risk-adjusted comparison.
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Try Stock Return Calculator →Can CAGR be negative?
Yes. A negative CAGR means the investment lost value over the period. If you invested $10,000 and it became $7,000 over 3 years, the CAGR is about -11.2%. Negative CAGR is a clear signal that something went wrong with the investment thesis.
What's the difference between CAGR and average return?
Average return simply adds up yearly returns and divides by years. CAGR accounts for compounding. Example: +50% one year, -50% the next. Average return = 0%. But $100 → $150 → $75. CAGR = -13.4%. CAGR gives the true picture because it reflects compounding effects.
What's a good CAGR for a stock?
The S&P 500's long-term CAGR is about 10%. Beating 10% consistently is excellent. For individual stocks, 15-20% CAGR over 5+ years is outstanding (think Apple, Amazon). For revenue growth, 20%+ CAGR signals a high-growth company. Always compare to the relevant benchmark.