CAGR: the growth number that doesn't lie

When someone says an investment "returned 12% a year," they almost always mean the compound annual growth rate, or CAGR. It's the single steady yearly rate that would have taken your starting amount to your ending amount over the same period — the honest annualized number behind a messy string of up and down years.

The formula

CAGR = (end value ÷ start value) ^ (1 ÷ years) − 1

So $1,000 that grows to $4,000 over 12 years has a CAGR of (4,000 ÷ 1,000)^1/12 − 1 ≈ 12.2% a year. Notice it doesn't care what happened in the middle — it collapses all the drama into one comparable rate.

Why "average annual return" lies

Suppose an asset rises 50% one year and falls 50% the next. The simple average is 0% — sounds like a wash. But $1,000 → $1,500 → $750. You lost a quarter of your money. CAGR tells the truth: about −13% a year. The simple average ignores the brutal arithmetic of compounding, where a 50% loss needs a 100% gain just to break even. Big swings make the gap between the two numbers wider, which is exactly why volatile assets are so often quoted with the flattering average instead of the honest CAGR.

What about regular contributions?

CAGR assumes one lump sum sitting from start to finish. The moment you add money over time — like with dollar-cost averaging — a single start-to-end ratio no longer describes your experience, because each dollar was invested for a different length of time. The fair measure then is a money-weighted return (an internal rate of return, or IRR), which solves for the one rate that makes all your contributions grow into your final balance. Every result on this site uses the lump-sum CAGR for a single investment and the money-weighted rate when you choose to invest a bit each year.

Want to see it on real history? The annual-return figure on any scenario — say Apple since 2010 — is the CAGR, and you can read exactly how it's computed on the methodology page.