How It Works

CAGR (Compound Annual Growth Rate) calculates the constant annual return that would take your investment from its beginning value to its ending value. Unlike simple ROI, CAGR accounts for compounding and gives you a comparable annual rate.

Formula

CAGR = (Ending Value / Beginning Value)^(1/Years) - 1

In Google Sheets:

=POWER(ending/beginning, 1/years)-1

Or:

=(ending/beginning)^(1/years)-1

Example

5-Year Investment:

Initial Investment: $10,000
Current Value: $16,105
Time Period: 5 years

Formula: =(16105/10000)^(1/5)-1

Result: 10% CAGR

This means your investment grew at an average of 10% per year, compounded.

Common Scenarios

Stock Portfolio Growth

$50,000 grew to $85,000 over 7 years:

=(85000/50000)^(1/7)-1

Result: 7.87% annualized return

Retirement Account

$100,000 to $450,000 over 20 years:

=(450000/100000)^(1/20)-1

Result: 7.87% CAGR

Real Estate Appreciation

Home bought for $250,000, now worth $380,000 after 10 years:

=(380000/250000)^(1/10)-1

Result: 4.28% annual appreciation

Variations

Format as Percentage

=TEXT((ending/beginning)^(1/years)-1, "0.00%")

Returns “10.00%” instead of 0.10

Using RRI Function

Google Sheets has a built-in function:

=RRI(years, beginning, ending)

Example: =RRI(5, 10000, 16105) returns 0.10 (10%)

With Monthly Data

If you have months instead of years:

=(ending/beginning)^(12/months)-1

Pro Tips

CAGR smooths volatility - actual year-by-year returns vary wildly
Compare different investments fairly regardless of time period
Benchmark against indexes - S&P 500 historical CAGR is ~10%
Doesn’t show risk - two investments can have same CAGR with very different volatility

Understanding CAGR vs. Average Return

Year	Actual Return	Portfolio Value
Start	-	$10,000
1	+20%	$12,000
2	-10%	$10,800
3	+15%	$12,420
4	+5%	$13,041
5	+12%	$14,606

Simple Average: (20-10+15+5+12)/5 = 8.4%
CAGR: (14606/10000)^(1/5)-1 = 7.87%

CAGR is lower because it accounts for the compounding effect of losses.

Benchmark Comparison

Investment Type	Typical CAGR
S&P 500 (historical)	10%
Bonds	4-6%
Real Estate	3-5%
Savings Account	1-4%
Inflation	2-3%