Understanding CAGR vs Absolute Returns

Absolute return is the simplest way to measure an investment's performance: the total percentage gain (or loss) from the start to the end of a period, regardless of how long that period was.

Compound Annual Growth Rate (CAGR) expresses that same growth as a single, smoothed annual rate, as if the investment had grown at a constant pace every year. This makes it possible to compare investments held for different lengths of time on a like-for-like basis.

For example, a 50% absolute return sounds identical whether it happened over 2 years or 10 years, but the CAGR is very different in each case, roughly 22% per year in the first case and about 4% per year in the second. CAGR reveals the pace of growth that absolute return alone hides.

Neither figure captures the year-to-year ups and downs an investment actually experienced along the way. An investment with a smooth 12% CAGR and one that fell sharply before recovering to the same CAGR can feel very different to hold, even though the headline number matches.

Our free CAGR Calculator can help you work out the compounded annual growth rate between any two investment values over a chosen period, for educational reference.