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What is CAGR?

The Compound Annual Growth Rate (CAGR) is the compound discount rate which an investor would have to get to go from a present value to a future value.

The compound annual growth rate can be computed using the ending value of an investment and taking the Nth root of it for the number of compounding periods (usually years). The idea is to have a smoothed average number that an initial would have to have received in a compounding investment to end up at the future value.

Average annual return is sometimes confused for CAGR, but it is typically computed by actually taking the average of the rates earned from year to year, which does not take compounding into account and is not accurate. Advisors should always use the CAGR for accurate results, and solve for inflation when possible to get Real Return.

Keywords: inflation, compounding interest, average annual return, real return,