CAGR calculator

The first is quoting an arithmetic average instead. The right-hand table above is the whole argument: two years of +50% and −50% average to zero and leave you down 25%, which CAGR correctly reports as −13.4% a year. The gap between the two grows with volatility, so the more erratic a track record is, the more flattering its average looks. When a fund, a strategy or a screenshot quotes an 'average annual return', the first question is whether it is the average or the compound rate, and the second is why they chose the one they chose.

The second is applying CAGR to an account that had money going into it. The formula assumes one lump sum at the start and nothing touched until the end. If you were contributing monthly through a decline and then a recovery, your own money-weighted return can be several points a year higher than the CAGR of the same fund over the same period — you bought more of it cheaply. It also works in reverse, which is how someone can hold a fund that compounded at 9% and personally have earned 4%.

Where CAGR is exactly the right tool is comparing two things held for different lengths of time. A position up 60% over four years and one up 25% over eighteen months are not comparable as stated; at 12.5% and 16.0% a year they are. The projection table is there for the same reason in reverse — a rate is easier to sanity-check once you can see that 15% a year turns into a 16-fold gain over twenty years, which is a claim most strategies cannot support.