Investing Basics

CAGR Explained: The Only Return Metric That Really Matters

April 23, 2026·5 min read

CAGR — Compound Annual Growth Rate — is the smoothed annual return that would have grown your investment from its starting value to its ending value over a given period, assuming returns were reinvested.

It is the single most useful number for comparing investments held for different lengths of time. It is also the number most casual fund advertisements try to avoid showing you, because it tends to be smaller and less impressive than alternatives.

Why simple total return misleads

If someone tells you their investment "returned 60%", you have no idea whether that is good. 60% over one year is exceptional. 60% over twenty years is barely keeping up with inflation. Total return without a time period is a meaningless number.

CAGR fixes this by expressing the return as an annual rate, no matter how long the period was. Suddenly comparisons become fair: 8% per year is 8% per year, whether the period was 3 years or 30.

The formula, in plain English

CAGR = (Final value ÷ Starting value) ^ (1 / number of years) – 1

In words: divide what you ended with by what you started with, take the n-th root where n is the number of years, subtract 1, and multiply by 100 to get a percentage.

A worked example

You invested $10,000 and 6 years later it is worth $18,000. What is the CAGR?

1. 18,000 ÷ 10,000 = 1.8 2. 1.8 ^ (1 / 6) = 1.1029... 3. 1.1029 – 1 = 0.1029 4. × 100 = 10.29% per year

So your portfolio grew at an average compound rate of about 10.3% per year. That is roughly the long-run nominal return of the S&P 500 — a useful benchmark to anchor against.

What "compound" actually means

The word "compound" matters. Each year's gain is calculated on the previous year's new total, not on the original investment. So 10.3% per year for 6 years does not mean 6 × 10.3% = 61.8%. It means 1.103 ^ 6 = 1.80, which is the 80% total return we observed.

This is why long time horizons are so powerful. Small-sounding annual rates produce surprising end values when given enough decades to compound.

What a "good" CAGR looks like, historically

Some long-run CAGRs to anchor your expectations (these are nominal — before inflation):

US large-cap stocks (S&P 500), 1928–2023: ~10% per year
Long-term US treasuries, 1928–2023: ~5% per year
Cash (T-bills), 1928–2023: ~3.3% per year
Inflation, same period: ~3% per year

So a real (inflation-adjusted) long-run stock CAGR is closer to 6–7%. Anyone selling you a strategy with a "20% CAGR over the next decade" is either selling something or going to be very wrong.

The big limitation: CAGR ignores volatility

CAGR tells you the average. It does not tell you how violently the journey swung. Two portfolios can have identical 8% CAGRs over a decade. One might have moved smoothly upward. The other might have crashed 50% in the middle and clawed back. The second one is psychologically far harder to hold — and many investors sell at the bottom and never realise the 8%.

This is why CAGR should always be reported alongside max drawdown and volatility. We have full guides on both: max drawdown and how to think about portfolio risk.

See it in action

Open What-If Portfolio and load any preset. The stats bar shows the CAGR for whatever date range you pick. Switch the range from 1Y to 10Y and watch the CAGR stabilise — short-period CAGRs are noisy, long-period CAGRs are meaningful.