CAGR calculator: compound annual growth rate

Written by the Tactfolio research teamPublished 4 min read

CAGR, or compound annual growth rate, is the steady yearly rate that turns a starting value into an ending value. This CAGR calculator works it out from three numbers: where you started, where you ended, and how many years it took. It is a fair way to compare returns over different lengths of time.

  • CAGR = (ending value ÷ starting value) ^ (1 ÷ years) - 1.
  • $10,000 that grows to $20,000 in 7 years has a CAGR of 10.41%.
  • CAGR is not the same as the average of each year’s return.
  • CAGR hides the bumps along the way. Two investments with the same CAGR can feel very different to hold.

Result

Compound annual growth rate (CAGR)
10.41%
Total return
100%
Gain or loss
+$10,000.00

How to use the CAGR calculator#

Type the starting value, the ending value and the number of years. For part of a year, use decimals: 18 months is 1.5 years. The calculator shows the CAGR, the total return, and the gain or loss in money.

How do you calculate CAGR?#

Divide the ending value by the starting value. Raise that to the power of 1 ÷ years. Then take away 1.

CAGR = (ending value ÷ starting value) ^ (1 ÷ years) - 1
total return = ending value ÷ starting value - 1

The ^ sign means “to the power of”. Raising to the power of 1 ÷ years undoes the compounding. It finds the one yearly rate that, applied every year, gives the same ending value.

A worked example#

Say $10,000 grew to $20,000 in 7 years.

  1. Ending ÷ starting: $20,000 ÷ $10,000 = 2.
  2. One over the years: 1 ÷ 7 = 0.1429.
  3. 2 to the power of 0.1429 is 1.1041.
  4. CAGR: 1.1041 - 1 = 0.1041, which is 10.41% a year.

Check it the other way. $10,000 grown by 10.41% a year for 7 years is about $20,000. The total return is 100%, because the money doubled.

Why is CAGR different from the average return?#

Say an investment gains 50% one year and loses 50% the next. The average of the two years is 0%. But $10,000 becomes $15,000, then $7,500. You lost 25%. The CAGR is about -13.4% a year, which tells the real story.

Losses hurt more than gains of the same size help. That is why CAGR is lower than the plain average whenever returns jump around.

When CAGR can mislead#

  • It hides the path. A smooth ride and a wild one can have the same CAGR. Look at the worst drop too.
  • It depends on the dates. Starting at a market low makes almost any CAGR look good.
  • It ignores money added or taken out. If you added money along the way, CAGR on the account balance will be wrong.
  • It looks back, not forward. A high CAGR in the past is not a promise about the future.

Common mistakes with CAGR#

  • Dividing the total return by the years. 100% over 7 years is not 14.3% a year. It is 10.41%, because returns compound.
  • Using CAGR for a few months. Over a short time, one lucky week can swing it a lot.
  • Comparing CAGRs from different dates. Compare two investments over the same start and end dates.
  • Forgetting costs and inflation. Fees and rising prices both shrink what your money can buy.

Try it on Tactfolio#

Every Tactfolio backtest of a year or more shows its CAGR beside its worst drop. How to read a backtest explains both numbers. In the Tactfolio strategy builder you can test a rule on past prices and see its CAGR. The classic strategies let you compare well-known rules on the same dates. To see how dividends add to growth, try the dividend calculator. To see a range of possible futures instead of one steady rate, try the Monte Carlo simulator. Every tool is on the free trading calculators page.

Common questions#

What is a good CAGR?#

There is no single good number. Compare a CAGR with a simple choice over the same dates, like an index fund. A higher CAGR is only better if you could live with the risk and the worst drop that came with it.

Is CAGR the same as annual return?#

Not quite. Annual return is what you made in one year. CAGR is the steady yearly rate over many years that ends at the same place. When returns jump around, CAGR is lower than the average annual return.

Can CAGR be negative?#

Yes. If the ending value is below the starting value, CAGR is negative. $10,000 that falls to $8,000 over 2 years has a CAGR of about -10.56%.

How do I calculate CAGR in Excel?#

Type =(end/start)^(1/years)-1 into a cell. For $10,000 that grew to $20,000 in 7 years, =(20000/10000)^(1/7)-1 gives 0.1041, or 10.41%.

What is the difference between CAGR and total return?#

Total return is the whole gain from start to end. CAGR spreads that gain over the years as a steady yearly rate. A 100% total return over 7 years is a 10.41% CAGR.

Sources

Understand the numbers