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Finance
Find the Compound Annual Growth Rate — the single steady annual rate that would take an investment from its starting value to its ending value over a given period.
CAGR answers one question: if this investment had grown at a perfectly constant annual rate instead of its actual bumpy path, what would that rate have to be to arrive at the same ending value? It's solved directly: CAGR = (final value ÷ initial value)^(1 / years) − 1. Assumptions: the formula only uses the two endpoints — the starting value, the ending value, and the number of years between them — and ignores everything that happened in between, so it smooths over any interim volatility, additional contributions, or withdrawals. It also assumes annual compounding is the appropriate lens even if the underlying investment actually compounded more or less frequently. If the final value is lower than the initial value, the result is a negative CAGR — a genuinely meaningful output describing an investment that declined overall, not an error to be hidden.
A simple average of yearly returns overstates growth when returns are volatile, because it ignores that losses and gains don't offset symmetrically once compounding is involved. CAGR instead solves for the single constant rate that actually reconciles the starting and ending values, which is why it's the standard way to compare investments over different periods.
Yes. If the final value is lower than the initial value, CAGR is negative — it's telling you the investment shrank on average each year, which is exactly the information a declining investment should produce.
No. CAGR only looks at the starting and ending values and the time between them — it can't distinguish growth from your own added contributions. If you invested more money partway through, CAGR will overstate the investment's actual performance; use a SIP or lumpsum calculator instead if contributions changed over time.