CAGR formula
Working backwards from the same formula:
When you enter two dates, years = days between them ÷ 365.25, so a period of 5 years and 6 months counts as about 5.5 years. For example, 1 January 2020 to 1 July 2025 is 2,008 days, or 5.4976 years. Growing 10,000 to 15,000 over that period is a CAGR of 7.65%.
Worked example: absolute return vs CAGR
An investment grows from 100,000 to 250,000 in 7 years.
- Absolute return = 250,000 ÷ 100,000 − 1 = 150%.
- CAGR = (2.5)^(1/7) − 1 = 13.99% a year.
Dividing 150% by 7 gives 21.43% a year, which overstates the result. It ignores compounding: each year's growth builds on the previous years' gains. CAGR is the figure to compare with a bank deposit rate or another fund's annual return.
CAGR vs average annual return
The simple (arithmetic) average of yearly returns can be badly misleading when returns go up and down. Take 100 that rises 50% and then falls 50%:
| Year | Return | Value |
|---|---|---|
| Start | 100 | |
| Year 1 | +50% | 150 |
| Year 2 | −50% | 75 |
The average return is (50 − 50) ÷ 2 = 0%, yet you lost a quarter of your money. The CAGR is (75 ÷ 100)^(1/2) − 1 = −13.40% a year, which matches what happened. With returns of +30%, −20% and +25%, 100 becomes 130: the average is 11.67% but the CAGR is 9.14%. CAGR is never higher than the arithmetic average.
CAGR vs XIRR for SIPs
CAGR assumes one investment at the start and one value at the end. A SIP adds money every month, so each instalment is invested for a different length of time. Applying CAGR to the total invested and the final value understates the real return, because later instalments had less time to grow. For regular or irregular cash flows, use XIRR, which accounts for the date of each payment. To plan monthly investing, try the SIP calculator.
What doubling in N years means
| Doubles in | CAGR needed | Rule of 72 estimate |
|---|---|---|
| 3 years | 25.99% | 24.00% |
| 5 years | 14.87% | 14.40% |
| 6 years | 12.25% | 12.00% |
| 8 years | 9.05% | 9.00% |
| 10 years | 7.18% | 7.20% |
| 12 years | 5.95% | 6.00% |
| 15 years | 4.73% | 4.80% |
The rule of 72 (72 ÷ years) is a good mental shortcut between about 6% and 10%, and drifts at high rates.
Tips for using CAGR
- Compare investments over the same period. A fund's 3-year and 10-year CAGR can differ a lot.
- CAGR hides volatility. Two investments with the same CAGR can have very different ups and downs.
- Check whether a quoted return includes dividends and fees.
- For short periods under a year, an annualised CAGR can look extreme. Look at the absolute return instead.
Frequently asked questions
What is a good CAGR?
How do I calculate CAGR in Excel or Google Sheets?
Can CAGR be negative?
Is CAGR the same as annualised return?
How long will it take to double my money?
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