Plot No. 24 · Money & Finance
CAGR Calculator
Work out the compound annual growth rate from a beginning value, an ending value and the number of years. CAGR is the ending value divided by the beginning value, raised to the power of one over the years, minus one. It is the steady yearly rate that would turn the start figure into the end figure.
CAGR only looks at the first and last values, so it smooths over the volatility in between and assumes a steady yearly rate. It needs positive start and end values and at least one year.
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How the compound annual growth rate is worked out
The compound annual growth rate is the single steady yearly rate that would grow a starting value into an ending value over a set number of years. The calculator divides the ending value by the beginning value, raises the result to the power of one over the number of years, subtracts one and multiplies by 100 to give a percentage.
CAGR deliberately smooths over volatility. It only looks at the first and last values and assumes the investment grew at exactly the same rate every year, even if the real path was bumpy. That makes it ideal for comparing investments held for different lengths of time, but it hides the ups and downs in between, which is why it differs from a simple total return.
How to use the CAGR calculator
- Enter the beginning value at the start of the period.
- Enter the ending value and the number of years between the two.
- Read the CAGR and the total growth, then change the years to see how the same total growth implies a different yearly rate.
Worked examples
Five-year growth
Inputs: 10,000 beginning value, 18,000 ending value, 5 years
Result: Total growth is 80%, but the CAGR is about 12.47% a year, the smoothed rate that compounds 10,000 up to 18,000 over five years.
Same growth, longer period
Inputs: 10,000 beginning value, 18,000 ending value, 10 years
Result: Total growth is still 80%, but the CAGR falls to about 6.05% a year because the same gain is spread over twice as long.
Limitations and common mistakes
Edge cases and limitations
- CAGR ignores the path between the start and end, so two investments with the same CAGR can have very different risk.
- It needs positive beginning and ending values and at least one year, otherwise it cannot be calculated.
- It does not include deposits, withdrawals, dividends or fees, only the two endpoint values.
Common mistakes
- Treating CAGR as the actual return in any single year, when it is an average rate that the real years rarely match.
- Confusing CAGR with total return, since the 80% total growth above is a very different number from the 12.47% yearly CAGR.
Frequently asked questions
How is CAGR calculated?
CAGR is the ending value divided by the beginning value, raised to the power of one divided by the number of years, then minus one, expressed as a percentage. Growing 10,000 to 18,000 over 5 years is a CAGR of about 12.47% a year, even though total growth was 80%.
How does CAGR differ from total return?
Total return is the simple percentage change from start to finish, so 10,000 to 18,000 is 80%. CAGR converts that into a single smoothed yearly rate, here about 12.47%. CAGR is more useful for comparing investments held for different lengths of time.
Why does CAGR smooth out volatility?
CAGR only looks at the first and last values, so it ignores the ups and downs in between. It assumes a constant rate of growth every year, which makes a bumpy investment look smooth. That is handy for comparison, but it hides how risky the path actually was.
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