Compound Annual Growth Rate (CAGR)

In short

Average annual return over a period, accounting for compounding

Imagine you planted a tree that grew 50% in 3 years. CAGR tells you it grew about 14.5% each year on average — not 16.7% (50÷3), because growth compounds. It's like saying 'if my investment grew at a steady rate, what would that rate be?'

CAGR measures the mean annual growth rate of an investment over a specified time period longer than one year. Unlike simple average returns, CAGR accounts for the compounding effect — the fact that returns in later years build on earlier gains (or losses). It is widely used to compare the performance of different investments, strategies, or portfolios over the same time frame. CAGR smooths out volatility, giving a single 'annualised' growth number.

Formula

CAGR = (Ending Value / Beginning Value)^(1/n) - 1

Thresholds

>20%: Exceptional growth
10-20%: Strong growth
5-10%: Moderate growth
<5%: Below market average

Related concepts

Total Return — If you bought a stock for £100, it went up to £110, and you also received £5 in dividends, your total return is £15 or 15%. It counts EVERYTHING — not just the price going up, but any cash the investment paid you along the way.
Annualised Return — If your investment made 5% in 6 months, the annualised return is about 10.25% (not exactly 10%, because of compounding). It's like translating different languages into English — it converts returns from any time period into a yearly number so you can compare apples to apples.
Compounding — If you earn 10% on $1,000, you have $1,100. Next year, you earn 10% on $1,100 = $110. Over 30 years, $1,000 becomes $17,449. Einstein called compounding the 'eighth wonder of the world.' Time is your greatest advantage.