CAGR is the single annual rate that turns your starting value into your ending value over the period — the honest way to annualize a multi-year return.
A +100% year followed by −50% averages to +25% arithmetically but the CAGR is 0% — you have exactly your starting money. That is why CAGR, not average returns, is the comparison standard.
The real CAGR subtracts inflation to show growth in purchasing power, which is the number that actually matters over decades.
CAGR describes the endpoints and deliberately says nothing about the path between them. Two investments with an identical 8% CAGR can have travelled very differently — one drifting steadily upward, the other halving in year three and recovering. Only one of those was holdable, and the single figure cannot tell you which.
It is also sensitive to the dates chosen, which is what makes it easy to present selectively. Starting a decade-long measurement at a market bottom and ending at a peak produces a number that is arithmetically correct and useless as a forecast. Where a series is available, comparing several overlapping periods is the cheapest defence.
For a series with contributions and withdrawals along the way, CAGR is the wrong tool: it assumes one amount in at the start and one out at the end. Money-weighted returns — the internal rate of return — account for the timing of cash flows and answer what the investor actually earned.
Frequently asked questions
What is CAGR?
The compound annual growth rate: the single steady yearly rate that turns the starting value into the ending value over the period. It is the standard way to annualize multi-year returns.
Why does CAGR differ from the average return?
Volatility drag: +100% followed by −50% averages +25% arithmetically, but the CAGR is 0% — you are back where you started. Geometric growth is the honest measure.
What is real CAGR?
The growth rate after subtracting inflation — the increase in actual purchasing power. Over decades it is the number that matters, not the nominal one.