How this number is made
Total return tells you how much the pile grew. Compound annual return tells you the steady yearly rate that would have turned the start into the end. A big total return over many years can still be a modest annual rate.
- Use values on the same basis: both before tax, or both after tax. Mixing them invents a return.
- Years can be a fraction. Two and a half years is 2.5.
- Do not use this if you added money during the period. The formula treats every dollar as if it had been there the whole time.
Formula
Total return = (ending − starting) ÷ starting. CAGR = (ending ÷ starting) ^ (1 ÷ years) − 1.
Worked example
$10,000 that becomes $18,000 in 5 years gained $8,000, an 80% total return. The compound annual rate is 12.5%. That is not 80% divided by 5.
Questions
Why isn’t the annual rate just the total return divided by years?
Dividing by years ignores compounding. Eighty percent over five years is 16% a year only as a simple average. The rate that compounds to the same ending value is lower, about 12.5% here.
Can the rate be negative?
Yes. If the ending value is below the start, both the total return and the annual rate are negative. A total loss is a −100% annual rate only when the ending value is zero.