CAGR, short for compound annual growth rate, is the single smoothed yearly rate at which an investment would have had to grow, with compounding, to turn its starting value into its ending value over a given number of years. It flattens the real year-to-year bumps into one steady percentage. A portfolio that doubled over ten years has a CAGR of about 7.2%, whether the ride there included a 30% gain, a 15% loss, or anything in between.
What CAGR Tells You
CAGR answers one narrow question: if your money had grown at exactly the same rate every year, what rate would land you on the actual ending value? The real path doesn’t matter. A stock that climbed 40% one year and dropped 20% the next didn’t grow steadily, but CAGR calculates the equivalent smooth rate that connects the two endpoints.
That makes CAGR a geometric measure, not an arithmetic one. Each year’s growth builds on the previous year’s accumulated value, so compounding is baked in. The distinction matters more than it sounds, and mixing up geometric returns with simple averages is one of the most common mistakes investors make.
The CAGR Formula
You need three numbers: the beginning value, the ending value, and the number of years between them.
CAGR = (Ending Value ÷ Beginning Value) ^ (1 ÷ Number of Years) − 1
Each piece does a specific job. Dividing the ending value by the beginning value gives you the total growth factor; $10,000 ending at $15,000 produces a factor of 1.5, meaning the money grew to one-and-a-half times its original size. Raising that factor to the power of one divided by the number of years isolates the annual portion of that growth. Subtracting one at the end strips out the original principal so you’re left with the growth rate alone.
Running the example end to end: $10,000 growing to $15,000 over five years is (15,000 ÷ 10,000) ^ (1 ÷ 5) − 1 = 1.5 ^ 0.2 − 1 ≈ 0.0845, or about 8.45% a year. If your $10,000 had grown at exactly 8.45% every year for five years, you’d land on $15,000.
Your beginning and ending values come from brokerage statements, 401(k) or IRA quarterly reports, or the financial statements inside annual reports and SEC filings. Monthly or quarterly brokerage statements show portfolio balances on specific dates, which is exactly what the formula wants.
Calculating CAGR in a Spreadsheet
You don’t need to work the exponent by hand. Excel and Google Sheets both have a built-in function called RRI with identical syntax: =RRI(number_of_periods, present_value, future_value). For the earlier example, typing =RRI(5, 10000, 15000) returns 0.0845, or 8.45%.1Microsoft Support. RRI Function Google Sheets uses the same function name and argument order.2Google Docs Editors Help. RRI Function
If you’d rather see the math written out, you can type the formula directly: =(ending_value/beginning_value)^(1/years)-1. For the same example that’s =(15000/10000)^(1/5)-1. Both produce the same number.
Why CAGR Differs from a Simple Average
This is the trap. The simple average return adds up each year’s percentage and divides by the number of years. CAGR accounts for compounding. Any time returns vary from year to year, which is almost always, the two numbers diverge, and the simple average usually looks better than reality.
Take an investment that gains 50% in year one and loses 30% in year two. The simple average is (50% + −30%) ÷ 2 = 10% a year. Sounds solid. Now run the actual dollars: $10,000 climbs to $15,000, then falls to $10,500. On a $10,000 investment held two years, that’s a CAGR of ($10,500 ÷ $10,000) ^ (1 ÷ 2) − 1, or about 2.47% a year. The simple average overstated the true compounded return by more than four times.
The gap widens as volatility grows. That’s why fund prospectuses and professional performance reports present multi-year results using CAGR or an equivalent compounded figure rather than arithmetic averages.
What CAGR Doesn’t Tell You
CAGR is a simplification, and like any simplification it hides things worth knowing.
It Says Nothing About Volatility
Two investments can share an identical CAGR and have wildly different risk profiles. A steady 8% every year and a path that swings between −20% and +40% can land on the same ending value over a decade. CAGR treats them as equivalent. Anyone who sat through those 20% drawdowns would disagree. Judging risk alongside return takes other metrics, such as standard deviation or maximum drawdown.
It Assumes No Deposits or Withdrawals
The basic formula assumes you invested a lump sum once and cashed out once. Most real portfolios don’t look like that. You add to a 401(k) each paycheck, reinvest dividends at different prices, or pull money out for a house. Each cash flow changes the math because each dollar is invested for a different stretch of time. For a portfolio with regular contributions or withdrawals, internal rate of return (IRR) is a more accurate measure, because it solves for a rate that accounts for every deposit and withdrawal.
It Doesn’t Predict the Future
A fund with a 12% CAGR over the past decade can easily return 4% over the next one. CAGR describes what already happened. FINRA rules bar brokerage firms from implying past performance will repeat,3Financial Industry Regulatory Authority (FINRA). Frequently Asked Questions About Advertising Regulation and that disclosure exists because investors routinely treat historical CAGR as a forecast.
Adjusting for Inflation and Taxes
A raw CAGR is a nominal number. What your purchasing power actually gains depends on what’s left after inflation and taxes.
Real CAGR After Inflation
To strip inflation out, use: Real CAGR = ((1 + Nominal CAGR) ÷ (1 + Inflation Rate)) − 1. If your nominal CAGR is 8.45% and inflation runs at 2.7% (the Federal Reserve’s median projected PCE inflation for 2026), your real CAGR drops to about 5.6%.4Federal Reserve. FOMC Projections Materials, Accessible Version An investment that doubles in nominal terms over ten years at a 7.2% CAGR has a real CAGR closer to 4.4% if inflation runs near that level.
After-Tax CAGR
Gains on investments held longer than a year are taxed at long-term capital gains rates. For 2026, the brackets are:5Internal Revenue Service. Revenue Procedure 2025-32
- 0% on taxable income up to $49,450 for single filers or $98,900 for married couples filing jointly.
- 15% on taxable income above those thresholds up to $545,500 (single) or $613,700 (joint).
- 20% on taxable income above $545,500 (single) or $613,700 (joint).
Higher earners may also owe the 3.8% Net Investment Income Tax on top. To get a rough after-tax CAGR, multiply your nominal CAGR by (1 − your effective capital gains tax rate). At a 15% rate, an 8.45% nominal CAGR falls to about 7.18% after tax, and once inflation comes out, real after-tax growth lands near 4.4%.
Where You See CAGR in Fund Disclosures
When mutual funds advertise performance, federal rules dictate how the numbers are presented. SEC Rule 482 requires investment company advertisements to include average annual total return for one-, five-, and ten-year periods, calculated using standardized methods prescribed in the fund’s registration form.6eCFR. 17 CFR 230.482 – Advertising by an Investment Company as Defined in Section 2(a)(36) of the Investment Company Act of 1940 Those prescribed methods use the same compounding logic as CAGR, which is why those annualized percentages show up on nearly every fund factsheet.
FINRA Rule 2210 adds another layer for brokerage firm communications: all materials sent to the public must be fair and balanced, and firms cannot omit material facts that would make a presentation misleading. Retail communications showing mutual fund performance must disclose the fund’s total annual operating expense ratio from the prospectus fee table.3Financial Industry Regulatory Authority (FINRA). Frequently Asked Questions About Advertising Regulation Those expenses come straight out of returns, so a fund advertising a 10% CAGR with a 1.2% expense ratio delivers closer to 8.8% into your account.
How to Use CAGR
Comparing Investments of Different Sizes
One of CAGR’s strongest uses is putting different investments on equal footing. A $5,000 position that grew to $9,000 over six years and a $100,000 position that grew to $140,000 over four years look incomparable at a glance. Their CAGRs, roughly 10.3% and 8.8%, give you a direct read on capital efficiency regardless of the amounts.
Benchmarking Against the Market
Knowing your portfolio’s CAGR is only half the picture. The other half is whether a plain index fund would have gotten you to a similar place with less effort. The S&P 500’s long-term annualized return has historically sat around 10% a year before inflation, though individual decades swing widely. If an actively managed portfolio’s CAGR trails a simple index fund over the same stretch, the fees and complexity aren’t earning their keep.
The Rule of 72
A fast shortcut: divide 72 by an annual growth rate to estimate how many years it takes money to double. At a 9% CAGR, your money doubles in roughly eight years. At 6%, it takes twelve. The arithmetic is rough, but it’s useful for sizing up whether a quoted rate is impressive or ordinary. An investment that hasn’t doubled in fifteen years has a CAGR below 5%, which barely keeps up with historical inflation.