Understanding Your Investment's Average Return

Measuring performance is critical for any investor. This calculator simplifies the process by providing the most accurate measure of an investment's average return over time: the Compound Annual Growth Rate (CAGR).

Why Use CAGR instead of a Simple Average?

A simple average return can be misleading because it doesn't account for the compounding effect or the volatility of returns. For example, if an investment goes up 50% in year one and down 50% in year two, a simple average would suggest a 0% return. However, if you started with $100, you'd have $150 after year one and only $75 after year two, a real loss of 25%.

CAGR provides the true year-over-year growth rate as if the investment had grown at a steady pace. It gives you a "smoothed out" average that accurately reflects your investment's performance from its starting point to its ending point.

How to Interpret the Results

• Compound Annual Growth Rate (CAGR): This is the key metric. It tells you the annual rate your investment would need to grow at to get from the starting value to the ending value over the specified period. It's the best way to compare the performance of different investments.
• Total Return: This is the overall percentage gain or loss on your original investment. While useful, it doesn't tell you anything about how long it took to achieve that return. A 100% return in 2 years is much better than a 100% return in 10 years, and CAGR makes this distinction clear.
• Absolute Gain / Loss: This is the straightforward profit or loss in dollar terms. It shows you the total amount of money your investment made or lost.

The Power of CAGR

CAGR is an essential concept for long-term financial planning. Whether you're assessing a mutual fund, a stock portfolio, or a real estate investment, calculating the CAGR provides a clear and accurate picture of its historical performance. This allows for better-informed decisions about where to allocate your capital in the future.