CAGR (Compound Annual Growth Rate) is the smoothed annual rate of return that shows how an investment grew over a multi-year period as if it had grown at a steady rate each year. It’s the gold standard for comparing trading performance over time because it accounts for compounding and normalizes different time periods.
- CAGR smooths volatile returns into an equivalent steady annual rate
- S&P 500 historical CAGR is approximately 10%; beating this consistently is the goal
- CAGR allows fair comparison across different time periods and strategies
How CAGR Works
CAGR tells you the constant rate of return that would take you from your starting value to your ending value over a given time period. It “smooths out” the volatility of individual years.
CAGR = (Ending Value / Beginning Value)^(1/n) - 1
Where:
- Ending Value = Final portfolio value
- Beginning Value = Starting portfolio value
- n = Number of years
Multiply the result by 100 to express as a percentage.
Quick Reference
| CAGR | Interpretation | Comparison |
|---|---|---|
| 5-7% | Conservative | Slightly below market average |
| 8-12% | Market-matching | S&P 500 historical average |
| 15-20% | Good | Outperforming most investors |
| 20-30% | Very good | Top-tier active trading |
| 30-50% | Excellent | Exceptional (verify sustainability) |
| 50%+ | Extraordinary | Rare and often unsustainable |
Example Calculation
Let’s calculate CAGR for a trading account:
Your Trading Results:
- Starting Value: $25,000 (January 2021)
- Ending Value: $52,000 (January 2025)
- Time Period: 4 years
CAGR Calculation:
CAGR = ($52,000 / $25,000)^(1/4) - 1
CAGR = (2.08)^0.25 - 1
CAGR = 1.201 - 1
CAGR = 0.201 = 20.1%
This means your account grew at an equivalent rate of 20.1% per year over the 4-year period.
CAGR is the smoothed annual growth rate of your trading account over multiple years. It accounts for compounding and lets you compare performance across different time periods. A good trading CAGR is 15-25% annually, beating the market’s historical 10% average.
Why CAGR Beats Simple Averages
Consider this scenario over 3 years:
| Year | Annual Return | Account Value |
|---|---|---|
| Start | — | $100,000 |
| Year 1 | +50% | $150,000 |
| Year 2 | -40% | $90,000 |
| Year 3 | +30% | $117,000 |
Simple Average Return: (50% - 40% + 30%) / 3 = 13.3%
CAGR: ($117,000 / $100,000)^(1/3) - 1 = 5.4%
The simple average suggests 13.3% annual growth, but you only have $117,000 after starting with $100,000. CAGR’s 5.4% reflects actual performance. Always use CAGR for accurate assessment.
CAGR vs Other Return Metrics
| Metric | What It Measures | When to Use |
|---|---|---|
| CAGR | Annualized compound growth | Multi-year performance comparison |
| ROI | Total percentage gain/loss | Single investment evaluation |
| Absolute Return | Raw dollar or percentage gain | Snapshot of total profit |
| Annualized Return | Simple annual average | Quick rough estimate |
CAGR is best for comparing performance over different time periods. A 50% total return over 2 years (21.5% CAGR) is better than 50% over 5 years (8.4% CAGR).
Practical CAGR Benchmarks
| Time Period | $50,000 at 10% CAGR | $50,000 at 20% CAGR | $50,000 at 30% CAGR |
|---|---|---|---|
| 3 years | $66,550 | $86,400 | $109,850 |
| 5 years | $80,525 | $124,415 | $185,680 |
| 10 years | $129,685 | $309,585 | $689,180 |
| 20 years | $336,375 | $1,916,880 | $9,499,730 |
The power of even a few percentage points difference compounds dramatically over time. This is why consistent edge matters more than occasional home runs.
Common CAGR Mistakes
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Ignoring time period – A 100% return sounds amazing until you realize it took 8 years (9% CAGR). Always annualize.
-
Excluding withdrawals/deposits – If you added capital during the period, raw CAGR is inflated. Use time-weighted returns for accurate CAGR.
-
Too short a period – CAGR over 1 year is just annual return. CAGR becomes meaningful over 3+ years.
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Comparing different risk levels – 25% CAGR with 50% drawdowns isn’t comparable to 18% CAGR with 15% drawdowns. Pair CAGR with risk metrics.
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Forgetting taxes and fees – Calculate CAGR on after-tax, after-fee returns for realistic assessment.
How JournalPlus Tracks CAGR
JournalPlus automatically calculates your CAGR from trade history, accounting for deposits and withdrawals. You can view CAGR by strategy, instrument type, or custom time periods—helping you understand your true long-term performance and compare different approaches objectively.
