CAGR Explained: The Single Best Metric for Comparing Investments

What Is CAGR?

Compound Annual Growth Rate (CAGR) measures the mean annual growth rate of an investment over a specified time period longer than one year. It smooths out volatility and gives you a single, comparable number.

Why CAGR Matters

Unlike absolute returns, CAGR accounts for time — making it the standard metric for comparing stocks, mutual funds, and portfolios.

Example

If you invest $10,000 and it grows to $25,000 over 7 years:

• Absolute return: 150%
• CAGR: ~16.2%

The CAGR tells you what annual rate would produce that outcome if returns were perfectly even each year.

Limitations

CAGR does not reflect volatility. Two investments with the same CAGR can have wildly different risk profiles. Always pair CAGR with standard deviation or maximum drawdown.

Using CAGR Effectively

1. Compare funds over the same period.
2. Use periods of 3, 5, and 10 years for a complete picture.
3. Don't chase the highest CAGR without considering risk.

Try our CAGR Calculator to evaluate your own investments.