Investing
CAGR vs Total Return: Which Number to Trust
By MarketsBench · Published · 2 min read
Total return tells you how much an investment grew. CAGR (compound annual growth rate) tells you how fast. The first is the bigger, more exciting number. The second is the one you can compare.
The two formulas
Total return = (ending value ÷ starting value) − 1
CAGR = (ending value ÷ starting value)^(1 ÷ years) − 1
$10,000 that grows to $25,000 over 6 years:
- Total return: $25,000 ÷ $10,000 − 1 = +150%
- CAGR: 2.5^(1/6) − 1 = +16.5% a year
CAGR is the steady yearly rate that would turn the starting value into the ending value over the same time. Real returns are never that smooth, but the smoothed rate is what makes two investments comparable.
Why total return misleads
Three results, all starting from $10,000:
| Result | Years | Total return | CAGR |
|---|---|---|---|
| $20,000 | 3 | +100% | +25.99% |
| $25,000 | 6 | +150% | +16.5% |
| $30,000 | 10 | +200% | +11.61% |
Ranked by total return, the 10-year result looks best. Ranked by CAGR, it is the weakest by a wide margin. Total return hides the time it took, and time is the cost of every investment.
The average-return trap
A simple average of yearly returns overstates what you actually earned.
An account gains 50% in year one and loses 50% in year two. The average of the two years is 0%. The money tells a different story:
$10,000 × 1.5 × 0.5 = $7,500
That is a −25% total return and a CAGR of −13.4% a year. CAGR uses the start and end values, so it captures what really happened; the arithmetic average does not. Whenever someone quotes an "average annual return", ask whether it is compounded.
Turning CAGR back into time
Once you have a yearly rate, the rule of 72 gives a quick doubling time: divide 72 by the rate. At 8% a year money doubles in about 9 years; at 12%, about 6. It is most accurate between roughly 6% and 10%.
For anything more precise, or to add regular deposits, model it with compounding directly.
When CAGR is the wrong tool
- Deposits and withdrawals. CAGR assumes the only change in value is growth. If you added money along the way, the figure is inflated. Use a money-weighted return instead, or measure each period between deposits.
- Very short periods. A 30% gain in four months annualises to a huge CAGR that will not repeat. Annualise short periods cautiously, if at all.
- Risk. Two investments with the same CAGR can have very different drawdowns along the way. CAGR measures the destination, not the ride.