About the Average Return Calculator
This calculator finds the average annual return that connects a starting value to an ending value over a number of years. It computes the compound annual growth rate, which is the only average that correctly describes investment performance.
The formula
CAGR = (ending / starting)^(1/years) − 1The result is the constant annual rate that would have produced the actual outcome. It differs from the arithmetic mean of yearly returns whenever those returns vary.
How to use this calculator
- 1Enter your Starting Value ($). The field starts at
10000, which you can overwrite. - 2Enter your Ending Value ($). The field starts at
18000, which you can overwrite. - 3Enter your Number of Years. The field starts at
5, which you can overwrite. - 4Read the result straight away — it recalculates as you type, so there is no button to press. Use Share to copy a link that reopens the page with your exact numbers filled in.
Worked example
| Input | Value |
|---|---|
| Starting Value ($) | 10000 |
| Ending Value ($) | 18000 |
| Number of Years | 5 |
Result
CAGR (Compound Annual Growth Rate): 12.47%
Simple Annual Return: 16.00%
Total Return: 80.00%
Total Gain: $8,000.00
Those are the values the page loads with, so you can reproduce this result yourself and then change one field at a time to see what drives the outcome.
Understanding your result
The arithmetic mean of annual returns systematically overstates performance. A portfolio gaining 50 percent then losing 50 percent has an arithmetic mean of zero but is actually down 25 percent — the geometric mean, or CAGR, correctly reports about −13.4 percent per year. The gap widens with volatility, which is why fund marketing sometimes prefers the arithmetic figure.
CAGR is the right measure for a lump sum held throughout, but not for a portfolio with deposits and withdrawals. Where cash flows enter and leave, the money-weighted return or internal rate of return reflects your actual experience, since the timing of contributions affects the outcome.
Things worth knowing
- Always use CAGR rather than an average of annual returns when comparing investments.
- Subtract inflation for the real return, which is what determines purchasing power.
- CAGR reveals nothing about volatility. Check standard deviation or maximum drawdown alongside it.
- For portfolios with contributions, use IRR rather than CAGR.
- Short measurement periods are noise. Judge performance over full market cycles.
Frequently asked questions
Why does CAGR differ from the average of annual returns?+
Because gains and losses compound rather than add. Gaining 50 percent then losing 50 percent averages to zero arithmetically but leaves you down 25 percent, which CAGR correctly reports.
What is a good annual return?+
Long-run US equity returns have averaged roughly 10 percent nominally and 7 percent after inflation, with wide variation over any decade. Whether a given return is good depends on the risk taken and the relevant benchmark.
Should I use nominal or real return?+
Nominal for comparing investments, real — nominal minus inflation — for judging whether purchasing power grew. Over thirty years the two tell substantially different stories.
Does CAGR account for deposits and withdrawals?+
No. It assumes a single amount held throughout. For a portfolio with cash flows in and out, internal rate of return or money-weighted return reflects your actual result.