CAGR Is a Smoothed Rate, Not the Path Taken
CAGR is the constant annual compound rate that would transform the beginning value into the ending value over the selected period. It is useful for normalizing multi-year growth to one annualized figure.
CAGR hides year-to-year volatility and does not account for intermediate contributions or withdrawals. If dated cash flows occur during the period, a money-weighted return such as IRR or XIRR answers a different question.
CAGR is best thought of as a smoothing rate. It answers: what constant annual growth rate would take the starting value to the ending value over this many years? Real investments and businesses rarely grow at that smooth rate, so CAGR hides volatility between the endpoints. It is useful for comparing long-term growth across periods, but it should not be read as the return that actually occurred in every individual year.
Frequently Asked Questions
Can two investments with very different volatility have the same CAGR?
Yes. CAGR only uses the beginning value, ending value and elapsed time, so it does not describe the path between them.
Should I use CAGR when there are deposits and withdrawals?
Not by itself. Intermediate cash flows require a return method that accounts for their timing.
Can two investments have the same CAGR but very different risk?
Yes. CAGR uses only the beginning value, ending value and time. One investment may have been stable while another experienced large gains and losses between the same endpoints.
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