CAGR (compound annual growth rate).
In plain English
Compound annual growth rate answers a narrow question: if growth had been perfectly smooth, what constant yearly rate would connect the beginning and ending values. You divide the ending value by the beginning value, take the root matching the number of years, and subtract one. It is useful for comparing periods of different lengths on a common footing. It also hides everything that happened in between, including a collapse and a recovery. Two investments with the same compound annual growth rate can have felt completely different to hold.
01Why it matters
It is the honest way to compare growth across different time spans, as long as you remember it describes the path only at its two endpoints.
02The math, step by step
An investment goes from $10,000 to $16,105 over five years. $16,105 divided by $10,000 is 1.6105. The fifth root of 1.6105 is about 1.10, so the compound annual growth rate is 10 percent, even if one of those years was negative.
Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.
03What this is NOT
A simple average of annual returns overstates growth whenever returns vary. Gain 50 percent then lose 50 percent and the simple average is zero, but $100 becomes $75. Compound annual growth rate uses the actual endpoints and reports negative 13.4 percent a year.
04Receipts
Every figure on this page is sourced to a primary document. Tap to open the original.
Plain-English answers from our glossary. Receipts included. Never advice.
Educational tool. Answers come only from ClearMoneySchool's published glossary and are not advice. Why we never give advice