CAGR (Compound Annual Growth Rate)

CAGR is the smoothed annual growth rate of an investment. It's what you'd get if your account grew at the same constant percentage every year to reach its current value. The formula: (ending value / starting value)^(1/years) − 1. CAGR is the standard way to measure long-term performance because it accounts for compounding. CAGR strips out the year-to-year volatility and shows the underlying compounding rate. A strategy that goes +50%, −20%, +30% over three years has a CAGR of about 16% — not the simple average of 20%. Compounding works against you in losses faster than it works for you in gains. CAGR alone isn't enough — pair it with max drawdown to evaluate quality. A 20% CAGR with 10% max drawdown is excellent. A 20% CAGR with 50% max drawdown is unsurvivable for almost everyone.