CAGR Calculator
Calculate Compound Annual Growth Rate (CAGR) for your investments. CAGR shows the smoothed annual rate of return, making it perfect for comparing investments with different holding periods.
Understanding Return on Investment (ROI)
Return on Investment (ROI) is the most widely used metric for evaluating investment profitability. It measures the percentage gain or loss on an investment relative to its cost. While simple to calculate, ROI has a key limitation—it doesn't account for time.
ROI and CAGR Formulas
ROI = ((Final Value - Initial Investment) / Initial Investment) × 100
CAGR = ((Final Value / Initial Value)^(1/Years)) - 1
Example Calculations
| Initial | Final | Period | ROI | CAGR |
|---|---|---|---|---|
| $5,000 | $12,000 | 6 years | 140% | 15.74% |
| $200,000 | $500,000 | 8 years | 150% | 12.14% |
Why CAGR Matters
A 50% ROI sounds great, but context matters. 50% over 1 year is excellent (equivalent to 50% CAGR), but 50% over 10 years is poor (only 4.14% CAGR). CAGR normalizes returns to an annual rate, allowing fair comparison between investments held for different periods.
ROI Benchmarks by Investment Type
- Stock Market (S&P 500): ~10% annual historical return
- Real Estate: 8-12% annual return (including rental income)
- Bonds: 3-6% annual return (lower risk)
- Savings Account: 0.5-2% annual return
- Venture Capital: 15-25% target IRR (high risk)
Frequently Asked Questions
What is the CAGR formula?
CAGR = (Final Value / Initial Value)^(1/Years) - 1. It represents the constant rate of return needed annually to grow an investment from its beginning to its ending value over a specified period.
Is higher CAGR always better?
Higher CAGR indicates better performance, but consider risk. A volatile investment with 15% CAGR may be riskier than a stable 10% CAGR investment. Also compare against benchmarks like S&P 500 (~10% historical CAGR).