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What is CAGR and Why Does It Matter?
What is CAGR?
Compound Annual Growth Rate (CAGR) is the annualized rate of return that an investment would have needed to grow from its beginning value to its ending value, assuming profits were reinvested each year.
The Formula
CAGR = (End Value / Start Value) ^ (1 / Years) - 1
Example
If you invested €10,000 and after 10 years it grew to €21,589:
- CAGR = (21,589 / 10,000) ^ (1/10) - 1
- CAGR = **8.0%**
This means your investment grew at an average of 8% per year, compounded.
What Makes a Good CAGR?
| Rating | CAGR Range |
|---|---|
| Excellent | > 12% |
| Good | 8% - 12% |
| Average | 5% - 8% |
| Poor | < 5% |
Why CAGR Matters
- **Smooths out volatility** — Unlike simple average returns, CAGR accounts for compounding and gives a realistic picture of growth.
- **Comparable across investments** — You can directly compare the CAGR of stocks, bonds, real estate, or entire portfolios.
- **Accounts for time** — A 50% total return over 5 years is very different from the same return over 20 years. CAGR normalizes for time.
CAGR vs. Average Return
Be careful not to confuse CAGR with average annual return:
- Year 1: +50%, Year 2: -33% → Average return = 8.5%, but actual CAGR = **0%** (€10,000 → €15,000 → €10,000)
This is why CAGR is a more accurate measure of real investment performance.