CAGR (Compound Annual Growth Rate)
Also called: cagr, compound annual growth rate, annualised return, annualized return.
How it is read
CAGR is right for one lump investment watched from start to end. No money is added or withdrawn in between. Read that way, it makes periods of different lengths comparable. A total return over the whole period cannot do that. It is worked out from the ratio of ending value to starting value. That ratio is raised to the power of one divided by the number of years. Then one is taken away. Both values must be positive. The period must be measured correctly.
What it does not tell you
CAGR hides the path completely. Two investments with the same CAGR can have had very different worst points along the way. That means it describes neither volatility nor drawdown. It is the wrong measure the moment money is added or withdrawn part-way. It treats the whole amount as invested for the whole period. For irregular cash flows the dated calculation is the right one. Annualising a short holding period also exaggerates. A past rate is not a forecast.
Related concepts
CAGR, XIRR and Absolute Return: Three Answers About One Account
Absolute return is the total change from start to end. It says nothing about time. CAGR turns that total into one steady yearly rate. It is honest only when no money moved in or out along the way. XIRR uses the date of every contribution and withdrawal. So XIRR is the one that fits a schedule of payments. Same account, three numbers, three different questions.
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