A Compound Annual Growth Rate (CAGR) Calculator
CAGR is the compound annual growth rate of an investment (or anything measurable) over a particular period of time. The calculation represents a steady level of growth from a beginning value to an ending value and is used to smooth out uneven investment returns. This enables investors to effectively evaluate performance by calculating the return or loss for each of position.
Evaluate and Compare Investments
The compound annual growth rate is considered to be an effective formula for evaluating investment performance over time. It is often used to evaluate how a stock performed against stocks or against a market index or to compare historical returns.
Smoothing Out Investment Returns
CAGR represents the cumulative effect of gains (and losses) on an original investment over a period of time and is typically expressed as an annualized rate at which the capital has compounded over the time period.
As an example, if an investment produced a 10% annual compound return over a five year period, this means that, at the end of the fifth year, the investment value would be equal to what the value would be if the investment had earned 10% per year over each of the five years. This does not, however, mean that the investment actually gained exactly 10% each year for that period.
The compound annual growth rate is not financial reality as a stock position might be up significantly one year and down the next. The CAGR annualizes the return for that stock as if it had grown at an even pace.
CAGR Does Not Account for Investment Risk
Because CAGR smoothes out the investment return over time, it is important to note that CAGR does not reflect investment risk. Investment returns can be volatile (particularly with stocks), varying significantly year to year and CAGR hides that volatility. Volatility is, of course, is important to consider when making investment decisions. Mutual funds are known to emphasize CAGR without addressing fund risk.
CAGR and the S&P 500
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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.
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