What Is CAGR?
CAGR (Compound Annual Growth Rate) is the rate at which an investment would have grown if it grew at a steady rate each year. It smooths out volatility to give you a single annual percentage that represents the overall growth from start to finish ??? regardless of how bumpy the ride was year to year.
CAGR is one of the most widely used metrics in finance for comparing investments, evaluating business growth, and benchmarking portfolio performance against indexes like the S&P 500.
The CAGR Formula
Example: An investment grows from $10,000 to $25,000 over 10 years. CAGR = (25,000/10,000)^(1/10) ??? 1 = 9.60% per year.
CAGR vs Average Annual Return
These two metrics often give very different answers and are frequently confused. Average annual return simply adds up all yearly returns and divides by the number of years. CAGR accounts for the compounding effect and represents actual portfolio growth. When a fund "loses 50% then gains 50%," the average return is 0% ??? but the CAGR is ???13.4% because you actually lost money.
Common CAGR Benchmarks
- S&P 500 index: ~10% CAGR historically (nominal), ~7% real (inflation-adjusted)
- US real estate: ~4%???6% CAGR (appreciation only, excluding rental income)
- Bonds (10-yr Treasury): ~4%???5% CAGR in current environment
- High-yield savings / CDs: ~4%???5% CAGR currently
- Inflation (CPI): ~3% CAGR historically ??? the minimum you need to maintain purchasing power
Frequently Asked Questions
What's a good CAGR for an investment?
Context matters enormously. A CAGR above 3% at least keeps pace with inflation. Above 5% beats bonds and savings accounts. Above 10% matches or beats the historical S&P 500 average. Above 15%???20% is exceptional and generally unsustainable over long periods ??? legendary investors like Warren Buffett have averaged ~20% CAGR over decades, which is why he's considered the greatest investor of all time.
Can CAGR be negative?
Yes ??? a negative CAGR means the investment lost value over the period. For example, if a $10,000 investment fell to $6,000 over 5 years, the CAGR is (6,000/10,000)^(1/5) ??? 1 = ???9.7% per year. This is one reason CAGR is so useful ??? it clearly shows the annualized cost of a bad investment over any time period.
What is the Rule of 72?
The Rule of 72 is a quick mental math shortcut: divide 72 by the CAGR to estimate how many years it takes to double your money. At 10% CAGR, money doubles in about 7.2 years. At 6%, it takes 12 years. At 3% (inflation rate), prices double every 24 years. It's remarkably accurate for rates between 2% and 20%.
How is CAGR different from IRR?
CAGR measures the growth rate between just two points in time ??? a starting value and an ending value. IRR (Internal Rate of Return) accounts for multiple cash flows at different points in time, making it more appropriate for investments with ongoing contributions or distributions (like real estate with rental income, or a business with irregular profits). For a simple buy-and-hold investment with no interim cash flows, CAGR and IRR are equivalent.
