CAGR: The Secret Weapon to Understand Return on Investment

WalletAnxietyPatient · 2025-11-28T19:13:39+00:00

CAGR (Compound Average Growth Rate) is an important indicator for measuring investment returns, indicating what the final return would be if the investment grows at the same rate each year. The accurate annual growth rate can be calculated through the formula, which helps to compare different investments and identify misleading promotions. CAGR is an average value that reflects long-term trends rather than actual returns. It is essential to follow CAGR before investing to avoid being misled.

WalletAnxietyPatient

2025-11-28 19:13:39

Abstract generation in progress

Do you often see a certain coin or stock saying “average annual growth rate of 50%”, but don't know how this number is calculated? Today, let's talk about CAGR (Compound Average Growth Rate), this thing can help you see clearly whether your investment has made a profit.

What is CAGR?

CAGR stands for Compound Average Growth Rate, simply put: If your investment grows at the same rate every year, what would that rate be to reach the current return?

For example, if you invested 10,000 in 2020 and it has grown to 30,000 by 2024, what is the average annual rise over these 4 years? Is it simply calculated as (3-1)/4=50%? Wrong! Because compound interest will automatically help you increase your investment - the money earned last year is also earning money this year. At this point, you need to use the CAGR formula:

CAGR = ( ending value ÷ starting value )^(1 ÷ number of years ) - 1

Using the above example: (30000 ÷ 10000)^(1/4) - 1 ≈ 31.6%

Look, this is the true average annual growth rate.

How to calculate

Three steps:

Final value divided by initial value: 30,000 ÷ 10,000 = 3
Fourth Root (1÷4 years): 3^0.25 ≈ 1.316
Subtract 1 to get percentage: 1.316 - 1 = 31.6%

Why Look at CAGR

Compare Investment Returns: How to compare investments over different time periods? Use CAGR to quickly understand who earns more.
Identify False Advertising: A certain coin “1000 times rise in 5 years”, what is the CAGR? Can you tell at a glance if it's an IQ tax?
Long-term Planning: If the historical CAGR of an asset is 20%, assuming it remains the same in the future, how many times can it multiply after 20 years? Expectations supported by data are the most reliable.

But remember: CAGR is an average, not an actual return rate. The actual investment journey certainly does not rise by the same degree every year; there are surges and drops. CAGR simply 'smooths out' these fluctuations, allowing you to see the long-term trend.

Calculate the CAGR before making investment decisions, don't be fooled by various “rise” concepts.

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