CAGR vs. Annualized Return

• CAGR (Compound Annual Growth Rate) shows the smoothed yearly growth over a period, including compounding.
• Annualized return tells you how much an investment returned, scaled to a yearly rate.
• The key difference: CAGR considers the entire period, while annualized return often describes shorter-term performance.
• Use CAGR for long-term comparisons, annualized return for recent performance snapshots.

The main difference between CAGR and annualized return is that CAGR tells you the average yearly growth over several years, while annualized return is usually a one-year figure, scaled to make comparisons easy.

Think of CAGR as the marathon runner's pace — it smooths everything out across the whole race. Annualized return is more like checking how fast the runner went in just one mile. Both are useful, but they answer different questions.

CAGR stands for compound annual growth rate. It shows the steady growth rate that would turn your starting investment into the ending value over a period of years. Want to learn more about it? We have the CAGR calculator to help you deepen your knowledge!

Annualized return expresses how much you earned in a shorter period, scaled to show what it would look like if that same rate lasted for a year.

Example: If you earned 2% in a single month, the annualized return would be roughly 24%. This doesn't mean you'll actually earn 24% over a year — it just shows the equivalent rate.

Annualized return is often used for:

• Short-term investments or trades.
• Evaluating fund performance over months or quarters.
• Comparing recent returns across different assets.

So, why the confusion? Both are "annual" measures, but they're not the same thing.

• CAGR — looks back over many years, tells you the average pace, and includes compounding.
• Annualized return — projects or reports what a shorter return looks like if stretched to one year, often ignoring compounding over long periods.

CAGR means long-term growth story, and annualized return means short-term snapshot.

Use CAGR when:

• Comparing investments over several years.
• Measuring business growth in revenue, customers, or profits.
• Wanting to smooth out volatility and get the big picture.

Use annualized return when:

• You only have performance data for part of a year.
• You're evaluating a fund or stock you've held for months, not years.
• You want to scale short-term performance into a yearly figure for comparison.

Let's say you invested $10,000 in a fund, and after 5 years it grew to $16,000.

CAGR = (16,000 / 10,000)^(1/5) - 1 ≈ 9.68%

9,68% per year. That's the steady long-term growth rate.

Now imagine another case: you put $10,000 into a stock for 3 months and made 5%. The annualized return would be about 20%, because it scales that 3-month return into a full-year equivalent. But if you actually held it for a year, the result could be completely different.

The above examples show why both metrics are useful — one looks at history, the other at short-term performance.

Annualized return can be misleading because it projects short-term gains into a full year, assuming the same pace continues. In reality, that rarely happens.

For instance, a 3% gain in one month annualizes to about 36%, but markets don't deliver the same every month. It's a good comparison tool for quick snapshots, but not a reliable way to judge long-term performance.

CAGR is powerful, but it also hides important details. It smooths out volatility, which can be a problem.

A stock that dropped 40% one year and then doubled the next might still show a nice CAGR. But that CAGR doesn't reveal the risk, the stress, or the actual path of growth