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Investment Details
CAGR Results
9.60%
6.39%
CAGR Analysis Summary
Understanding CAGR
What is CAGR?
CAGR (Compound Annual Growth Rate) is the rate at which an investment grows each year on average. It's the most reliable way to measure investment performance because it accounts for compounding - the effect of earning returns on your returns. CAGR smooths out volatility to show a steady growth rate.
CAGR Formula
Example: $100,000 grows to $250,000 in 10 years
CAGR = (250,000 / 100,000)^(1/10) - 1
CAGR = (2.5)^0.1 - 1
CAGR = 1.0960 - 1 = 0.0960 = 9.60% per year
Why CAGR Matters
- Accounts for Compounding: Shows true growth considering that profits earn profits each year
- Smooths Volatility: Ignores year-to-year fluctuations to show consistent annual rate
- Enables Comparison: Compare investments of different lengths objectively (5-year vs 10-year returns)
- Measures Reality: Shows actual annual return you would need to achieve the ending value
- Inflation Adjustable: "Real CAGR" shows purchasing power growth after inflation
CAGR vs Simple Average Return
Portfolio with volatile returns: Year 1: +50%, Year 2: -40%
Simple Average = (50% - 40%) / 2 = 5%
(Just average of numbers)
CAGR Calculation:
Start: $100,000
After Year 1: $100,000 × 1.50 = $150,000
After Year 2: $150,000 × 0.60 = $90,000
CAGR = ($90,000 / $100,000)^(1/2) - 1
CAGR = (0.90)^0.5 - 1 = 0.9487 - 1 = -5.13%
Key: CAGR shows -5.13% (you lost money), not 5% profit!
CAGR reveals the actual impact of volatility and compounding.
Real CAGR (Inflation-Adjusted)
Example: 9.60% CAGR with 3% inflation
Real CAGR = [(1 + 0.0960) / (1 + 0.03)] - 1
Real CAGR = [1.0960 / 1.03] - 1
Real CAGR = 1.0641 - 1 = 0.0641 = 6.41% real growth
Meaning: After inflation, your purchasing power grew 6.41% per year, not 9.60%
Real-World CAGR Examples
| Investment | Starting | Ending | Period | CAGR | Absolute Return |
|---|---|---|---|---|---|
| Savings Account | $10,000 | $10,630 | 10 years | 0.61% | 6.30% |
| Bonds | $10,000 | $14,194 | 10 years | 3.50% | 41.94% |
| Stock Market (Index) | $10,000 | $25,937 | 10 years | 9.77% | 159.37% |
| Growth Stocks | $10,000 | $51,874 | 10 years | 18.09% | 418.75% |
| Tech Stocks (High Risk) | $10,000 | $103,749 | 10 years | 27.07% | 937.50% |
| Cryptocurrency (Volatile) | $10,000 | $5,884 | 5 years | -11.26% | -41.18% |
Real Estate Investment
Property purchased for $200,000 appreciated to $400,000 in 12 years. CAGR = (400,000/200,000)^(1/12)-1 = 5.95% annual growth. After accounting for 3% inflation, real CAGR = 2.88%.
Business Growth
Startup valued at $1 million grew to $100 million in 8 years (angel investment). CAGR = (100,000,000/1,000,000)^(1/8)-1 = 58.25% per year. Exceptional unicorn growth!
Dividend Reinvestment
$50,000 invested grew to $125,000 over 15 years with dividends reinvested. CAGR = (125,000/50,000)^(1/15)-1 = 6.19% annual compound growth.
Frequently Asked Questions
What's a good CAGR?
Depends on investment type and period. 3-5% = good (bonds/index), 8-12% = excellent (stocks), 15%+ = exceptional (growth/tech). Remember: higher CAGR = higher risk!
Why not just use simple average returns?
Simple averages hide compounding effects. A +50%, -40% average shows 5% but you actually lost 5%. CAGR reveals the truth by accounting for how money grows year-over-year.
Should I care about inflation?
Yes! A 10% CAGR sounds great until you subtract 5% inflation, leaving 4.76% real growth. Real CAGR tells you actual purchasing power growth - the money that really matters!
Can CAGR be negative?
Yes! If your investment declined from $100k to $50k, that's -13.17% CAGR over 5 years. Negative CAGR = you lost money on average annually. It happens!
How do I compare two investments with different timelines?
Use CAGR! A 20% return in 2 years ($100k → $144k) = 20% CAGR. A 100% return in 10 years ($100k → $200k) = 7.18% CAGR. The 2-year is actually better!
Why is CAGR better than annualized return?
CAGR assumes compounding reinvestment each year. Annualized return is just total return ÷ years (no compounding). CAGR is more realistic for comparing actual growth.
What if I add money during investment?
Standard CAGR assumes no additions/withdrawals. If you added $20k after year 5, use "money-weighted return" (IRR) instead for accuracy. CAGR works for buy-and-hold only.
How long before CAGR becomes meaningful?
1-year returns are too volatile. 3+ years = somewhat meaningful, 5+ years = good, 10+ years = excellent for judging real performance. Longer = less volatility distortion.
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