CAGR (Compound Annual Growth Rate)
CAGR is the geometric annualized rate of return at which an investment grows, assuming returns are compounded and reinvested at a steady rate over a specified period.
Unlike a simple average return, which can be distorted by highly volatile years, CAGR provides a smoothed, annualized rate that shows the true compounding power of the portfolio. It is the most accurate way to compare the long-term performance of different asset classes and tactical strategies.
The formula for CAGR is:CAGR = (EV / BV)^(1 / n) - 1
Where EV is the Ending Value, BV is the Beginning Value, and n is the number of years. For example, if you invest $10,000 and it grows to $20,000 over 5 years, the CAGR is (2) ^ 0.2 - 1 = 14.87% per year.
On StrategyIndex.io, we track 10-year CAGRs for all strategies. Tactical strategies like Adaptive Asset Allocation show a high CAGR of 11.5%, compared to passive models like the Permanent Portfolio at 6.8%. CAGR should always be evaluated alongside Max Drawdown to understand the risk taken to achieve the return.