CAGR, or compound annual growth rate
CAGR, or compound annual growth rate, is a formula used to calculate an average annualised return (average amount of money earned from an investment over a set period of time, aka rate of return). Investors and analysts CAGR because for several reason:
- It provides a single, simple percentage showing the average annual growth rate of an investment over a set period, making it useful to compare the performance of different investments
- CAGR shows the effects of compounding growth and smooths out the volatility of returns over time, giving an accurate picture of an investment's performance
- It helps in benchmarking the performance of an investment against an index like the S&P 500, to show if an investment has met or exceeded expectations
- CAGR helps in projecting future possible values of investments, which has been useful for KiwiSaver retirement planning, and other long-term goals
To find a CAGR, you’ll need the initial investment value (PV), the final value (FV), and number of years the investment has grown (n).
CAGR formula:
Example: If you invested US$1,000 (PV) and it grew to US$1,500 (FV) over 3 years (n), the CAGR would be calculated as 14.47%:
Learn more about compounding growth and how it could help investors reach long term financial goals.
We acknowledge and thank the FMA, Dr Karena Kelly and Brook Taurua Grant, the RBNZ and the Māori Dictionary for their research which helped us with te Reo Māori kupu for this glossary.
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