CAGR — Compound Annual Growth Rate (Annualized Growth Rate)

Definition

CAGR (Compound Annual Growth Rate) is the annualized growth rate that accounts for compounding effect. It shows what percentage annually the investment grew, if it grew at a constant rate — even if in reality it fluctuated from year to year.

Formula

CAGR = (End Value / Start Value)^(1/n) - 1

Where n = number of years.

Example

You invested 10,000 PLN. After 5 years you have 16,105 PLN.

CAGR = (16,105 / 10,000)^(1/5) - 1 = 0.10 = 10%

Your investment grew an average of 10% annually (accounting for compound interest).

CAGR vs. Simple Average — Why It Matters?

Imagine a portfolio:

• Year 1: +50%
• Year 2: -30%

Simple average: (50 - 30) / 2 = +10% annually. Sounds great.

But actually: 10,000 → 15,000 → 10,500. CAGR = (10,500/10,000)^(1/2) - 1 = 2.5%.

Simple average overstates results. CAGR shows the truth.

When to Use CAGR?

• Comparing investments with different time horizons
• Evaluating funds and ETFs — standard benchmark
• Planning goals — if you want X in Y years, what CAGR do you need?
• Comparing with inflation — real CAGR = nominal CAGR - inflation

CAGR Limitations

• Doesn't show volatility — two investments can have the same CAGR, but one fluctuates ±5%, another ±40%
• Assumes profit reinvestment — if you withdraw dividends, real return will be different
• Works for lump sum investment — with regular contributions (DCA), IRR or MWRR is better

CAGR of Popular Assets (Historical Approximations)

How Freenance Can Help

Freenance automatically calculates the CAGR of your portfolio and individual assets. You see the real, annualized rate of return — not misleading simple average — and can compare your results with benchmarks.

👉 Check your portfolio CAGR in Freenance — freenance.io