CAGR

CAGR, compound annual growth rate, expresses multi-year growth as if it had grown at the same rate every year. However bumpy the path, it answers what the average annual rate effectively was.

It differs from a simple average, and that matters. Rise 100% in year one and fall 50% in year two and you are back where you started: the arithmetic average says 25%, but CAGR correctly says 0%, because it accounts for compounding.

That makes CAGR the honest measure for comparing long-run performance. Saying 9.9% a year is easier to compare against other options — and less prone to exaggeration — than saying 60% over five years.

CAGR still erases the journey, though. An asset rising 10% every year and one flat for four years before surging in the fifth can share the same CAGR. The number matches; the experience of holding them does not. It helps to read CAGR alongside the maximum drawdown. Two assets returning 10% a year are not equally holdable if one halved along the way.