CAGR is the single steady annual rate that would carry a starting value to an ending value over a given number of years, smoothing out every up and down year in between. It answers one question cleanly: on average, how fast did this actually grow per year, and it is the figure worth quoting when someone asks how a fund, a portfolio, or a business really performed rather than how it felt along the way.
What counts as a strong annual growth rate
Broad US stock indices have compounded at roughly 9-10% a year in nominal terms over long multi-decade stretches, closer to 6-7% once inflation is stripped out, so a CAGR near that range on a diversified equity holding is unremarkable rather than exceptional. Investment-grade bonds have typically compounded in the 4-5% range over similar long periods, and a plain savings account rarely clears low single digits.
A CAGR above roughly 15% sustained over many years is rare outside concentrated bets or a genuinely exceptional business, and it usually means the underlying holding carried far more volatility than the smooth annual figure lets on. A CAGR below zero simply means the ending value is lower than the starting value, whatever happened in the middle.
Context matters more than the number in isolation: a 6% CAGR on a bond ladder is solid, the same 6% on a growth stock fund would usually be considered disappointing given the risk taken to earn it.
Three worked examples
A 5,000 investment that grows to 13,000 after 10 years has a CAGR of about 10.0%, found from (13,000 / 5,000) raised to the power of 1/10, minus one. At that rate the balance would double again in roughly 7.3 years if the pace held.
Compare two funds held for the same eight years from the same 10,000 starting stake: Fund A finishes at 18,000, a CAGR of about 7.6%; Fund B finishes at 16,000, a CAGR of about 6.1%. A gap of roughly 1.5 percentage points a year compounds into an extra 2,000 of terminal value on this stake, which is why small CAGR differences between funds are worth taking seriously over long holding periods.
CAGR also hides the path. A 10,000 account that fell to 8,000 in year one before recovering to 13,000 by the end of year two still shows a CAGR of about 14.0%, calculated purely from the start and end values over two years. Anyone who only reads the headline rate would never know the position was down 20% at the halfway point, which is why CAGR is a summary of the destination and not a description of the ride.
Where the CAGR formula stops telling the full story
CAGR assumes a lump sum sitting untouched between the start date and the end date. The moment you add regular contributions, take withdrawals, or reinvest dividends at varying prices, the plain start-to-end formula no longer describes your actual return, and a money-weighted measure such as an internal rate of return is needed instead.
It also says nothing about the variance along the way. Two holdings can post an identical 8% CAGR while one moved in a straight line and the other swung between minus 30% and plus 50% each year; the smooth number treats both as equivalent even though the volatile path carries a much higher chance of an investor selling at the worst moment.
The result is also sensitive to the choice of start and end dates in a way that can mislead. Measuring from a market bottom to today inflates the figure, and measuring from a market peak deflates it, so a single CAGR quoted without its date range should be treated with some caution.
Taxes, inflation and timing
The CAGR this calculator returns is a pre-tax, nominal figure. In the United States, gains realised within a taxable brokerage account are taxed as short-term or long-term capital gains depending on the holding period, which reduces the growth rate an investor actually keeps compared with the same position held inside a 401(k) or IRA where tax is deferred or avoided.
In the United Kingdom, gains outside an ISA or pension are measured against the annual capital gains tax exempt amount, which has been cut sharply in recent tax years, so a larger share of a given CAGR now falls into taxable territory than it did a few years earlier.
To compare CAGR against a target such as a retirement goal, convert it to a real rate by subtracting expected inflation, since 8% nominal growth against 3% inflation leaves a real growth rate of roughly 4.9%, not 5%, because the two rates compound rather than simply subtract.
Frequently asked questions
- What is a good CAGR for a stock portfolio?
- A diversified equity portfolio compounding at roughly 8-10% a year in nominal terms over a decade or more is broadly in line with long-run US market history. Consistently higher figures usually reflect either concentrated risk or a period that happened to end near a market high, not a repeatable edge.
- How is CAGR different from the average annual return?
- A simple average adds up each year's percentage return and divides by the number of years, which overstates growth when returns are volatile because a big loss followed by an equal-sized percentage gain never actually gets you back to even. CAGR instead uses only the starting and ending values, so it reflects what actually happened to the money rather than the average of the yearly percentages.
- Can CAGR be negative?
- Yes. If the ending value is lower than the starting value, the formula returns a negative percentage, meaning the investment shrank on average each year over the period measured, regardless of any interim recoveries.
- Does CAGR account for dividends or interest paid out?
- Only if you include them in the ending value. If dividends were paid out in cash and spent rather than reinvested, using the share price alone as the ending value will understate the true CAGR of the investment; add the dividends back to the ending value, or use a total-return figure, to get an accurate rate.
- Why does a CAGR calculator need the number of years, not just start and end dates?
- The formula raises the ratio of ending to starting value to the power of one divided by the number of years, so the years figure directly sets how the growth is spread out. Using a rounded number of years instead of the exact fraction, such as counting 7 years for a period that actually spans 7 years and 4 months, will shift the resulting CAGR slightly.
- Is CAGR the same as the interest rate on a loan or savings account?
- Not exactly. A quoted savings or loan rate is usually a stated annual rate before compounding is applied, while CAGR is the effective compounded rate calculated after the fact from real starting and ending balances, so the two numbers can differ even when describing the same account.
Sources
- SEC Investor.gov — Compound Annual Growth Rate (CAGR) — Official glossary definition of CAGR as the smoothed annual rate implied by a start and end value.
- IRS Topic No. 409 — Capital Gains and Losses — US short-term versus long-term capital gains tax treatment, current for the 2025 filing season.
- HMRC — Capital Gains Tax allowances — UK annual exempt amount for capital gains outside an ISA or pension, reduced to 3,000 for the 2024/25 tax year.