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.

Quick Answer

CAGR (Compound Annual Growth Rate) is the annualized growth rate that accounts for compounding, showing what constant yearly rate would take an investment from its start value to its end value. It is calculated as (End Value / Start Value)^(1/n) − 1, where n is the number of years — so 10,000 PLN growing to 16,105 PLN over 5 years gives a 10% CAGR. It matters because a simple average overstates results (a +50%/−30% pair averages 10% but the true CAGR is just 2.5%), though CAGR ignores volatility and assumes profit reinvestment.

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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

FAQ

What is the formula for CAGR?

CAGR equals (End Value / Start Value)^(1/n) − 1, where n is the number of years. The result is expressed as a decimal that you multiply by 100 to get a percentage. It assumes profits are reinvested at the same rate each year.

Why is CAGR better than a simple average return?

Simple averages can dramatically overstate results because they ignore compounding and volatility. A portfolio gaining 50% one year and losing 30% the next has a 10% simple average but only about 2.5% CAGR. CAGR reflects the actual annualized growth path of your capital.

Does CAGR account for volatility or drawdowns?

No — CAGR only describes the smoothed start-to-end growth rate. Two investments with identical CAGRs can have very different risk profiles, with one swinging ±5% and another ±40%. To assess risk you need separate metrics like standard deviation or maximum drawdown.

Can I use CAGR for regular monthly contributions like DCA?

CAGR is designed for a single lump-sum investment with a defined start and end value. For regular contributions, IRR (Internal Rate of Return) or MWRR (Money-Weighted Rate of Return) gives a more accurate picture. Using CAGR on a DCA portfolio will produce misleading numbers.

How do I calculate real CAGR after inflation?

Subtract the average inflation rate from the nominal CAGR to get an approximate real CAGR. For example, a 10% nominal CAGR with 3% inflation gives roughly 7% real CAGR. For precision, use (1 + nominal) / (1 + inflation) − 1, which avoids small approximation errors.

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