How CAGR Helps You Measure Actual Investment Returns
By Surya Prakash
Financial Analyst & Editor
What is CAGR?
Compound Annual Growth Rate (CAGR) is the steady rate at which an investment would have grown if it grew at a constant rate compounded annually over the tenure. It is a geometric mean that represents the true rate of annual growth, smoothing out year-on-year volatility.
Why Absolute Returns Can Be Deceptive
Absolute returns only show the total percentage gain without accounting for time. If your investment grew by 50% over 2 years, your CAGR is 22.47%. If the same 50% growth took 5 years, your CAGR drops to 8.45%. CAGR provides a standardized timeline-based metric for comparison.
CAGR Formula and Practical Application
The CAGR formula is: CAGR = (Ending Value / Beginning Value)^(1 / Years) - 1. Use this formula to evaluate and compare the historical performance of stocks, mutual funds, gold, and real estate before investing.