The compound annual growth rate, or CAGR for short, measures the return on an investment over a certain period of time. Below is an overview of some of its uses and limitations.
Average Returns vs. CAGR
Consider an investment that starts with a value of $5,000. During the first year, the value falls by 50% to $2,500. The next year, the investment doubles and returns to a value of $5,000. The investment since inception obviously just broke even, but the average return ends up to be 25%, or the average of a 50% drop and a 100% return. In this case, the CAGR return is 0%, which would be considered more accurate than a 25% average return. The CAGR is superior to average returns when analyzing time series data (time intervals) because it considers the fact that investment returns compound over time.
Smoothed return
Despite the superiority of CAGR over average returns, the CAGR does have its limitations. One limitation is that it assumes a smoothed return over the period that’s measured. In reality, investments experience significant shortterm ups and downs. Instead, the CAGR only looks at the beginning and end value and assumes a constant return in between.
Data Mining
CAGR is also subject to manipulation as the time period used can be controlled by the user. For instance, a fiveyear return period can be shifted by a year to avoid a negative period (such as 2008), or to include a period of strong performance (such as 2013).
Multiple Cash Flows
CAGR is very straightforward when there is a beginning and ending value, and set period of time. But in reality, investments, such as mutual funds, have continuous cash inflows and outflows and are required to report monthly, quarterly, annual, and even daily returns. Relatively quickly, portfolio accounting software becomes needed as the math is difficult to be done by hand.

How do you calculate CAGR?
Find out how to understand and use the compound annual growth rate formula, and find out why it helps put an uneven performance ... Read Answer >> 
What's the difference between absolute and relative return?
Knowing whether a fund manager or broker is doing a good job can be a challenge for some investors. It's difficult to define ... Read Answer >> 
What is the difference between stated annual return and effective annual return?
Essentially, the effective annual return accounts for intrayear compounding, and the stated annual return does not. The ... Read Answer >> 
What is a good annual return for a mutual fund?
Explore the question of what constitutes a good annual return from investing in mutual funds and the factors that affect ... Read Answer >>

Investing
Compound Annual Growth Rate: What You Should Know
The CAGR is a good and valuable tool to evaluate investment options, but it does not tell the whole story. 
Investing
The Most Accurate Way To Gauge Returns: The Compound Annual Growth Rate
The compound annual growth rate, or CAGR for short, represents one of the most accurate ways to calculate and determine returns for individual assets, investment portfolios and anything that ... 
Financial Advisor
The 15 FastestGrowing RIAs
Registered investment advisors are consolidating their business and assets. Here are 15 of the fastestgrowing RIAs. 
Investing
How To Calculate Your Investment Return
How much are your investments actually returning? Find out why the method of calculation matters. 
Tech
Why to Watch Southeast Asia's Internet Economy
The world’s fastest growing internet region currently has a booming base of 260 million Internet users, growing at a rate of approximately 14% fiveyear CAGR. 
Investing
Overcoming Compounding's Dark Side
Understanding how money is made and lost over time can help you improve your returns. 
Managing Wealth
Morgan Stanley On the Trends in Asset Management (MS)
Learn about trends in the asset management industry and future prospects for its growth, according to a May 2016 Morgan Stanley report. 
Investing
Calculating Annualized Total Return
The annualized total return is the average return of an investment each year over a given time period. 
Investing
Accelerating Returns With Continuous Compounding
Investopedia explains the natural log and exponential functions used to calculate this value. 
Investing
5 Stock Market Metrics Explained
Learn how to evaluate a company's performance using metrics such as ROE, EPS and P/E ratio.

Compound Annual Growth Rate  CAGR
The Compound Annual Growth Rate (CAGR) is the mean annual growth ... 
Average Annual Growth Rate  AAGR
The average increase in the value of an individual investment ... 
Compound Return
The rate of return, usually expressed as a percentage, that represents ... 
Compound Interest
Compound Interest is interest calculated on the initial principal ... 
MAR Ratio
A measurement of returns adjusted for risk that can be used to ... 
Return
The gain or loss of a security in a particular period. The return ...