What CAGR tells you
The compound annual growth rate condenses a multi-year result into the steady yearly rate that would have taken you from the starting value to the ending value. Because it compounds, CAGR is the fair way to compare investments held over different periods: a portfolio that doubled in five years grew at about 14.9% a year, not 20%.
Where CAGR falls short
CAGR only looks at the two endpoints. If you added money midway, the true return on your activity differs from the CAGR, and a fund that swung wildly before landing on the same endpoint shows the same smooth rate as one that drifted gently. Pair CAGR with the IRR for cash-flow-heavy situations, and remember past growth never guarantees the next year.
Frequently Asked Questions
What is a good CAGR?
It depends on the asset and the era. Broad US stock indexes have compounded near 10% a year over long stretches, so a double-digit CAGR is strong for a diversified portfolio; a new venture may target far more to justify the risk.
How is CAGR different from a simple average return?
A simple average adds yearly returns and divides, which overstates results when returns swing. CAGR uses only the start and end values, so it reflects what actually happened to your money, including the drag of down years.
Can CAGR be negative?
Yes. If the ending value is below the starting value, CAGR comes out negative and represents the steady annual decline between the two points.