About the ROI calculation
Total return tells you how much you made; CAGR tells you how fast. They answer different questions, and confusing them is the most common error in comparing investments — a 50% return over ten years is far worse than a 50% return over two, despite the identical headline.
Formula
ROI = (Final − Initial) ÷ Initial × 100
CAGR = ((Final ÷ Initial)^(1/t) − 1) × 100
t = years heldWorked example
100,000 becoming 150,000 over 5 years: ROI = 50%. CAGR = (1.5^0.2 − 1) × 100 = 8.45% a year. Over 1 year the same 50% would be a 50% CAGR.
Frequently asked questions
Which figure should I actually use?
CAGR, whenever you are comparing anything held for different lengths of time. It normalises to a yearly rate, which is the only fair basis for comparison. Total return is useful only alongside the holding period.
Does CAGR mean I earned that every year?
No. It is the smooth equivalent rate. Actual year-to-year returns may have been wildly uneven, including losing years. CAGR deliberately hides that volatility, which is both its strength and its limitation.
Does this account for money added along the way?
No. This compares a single starting value to a single ending value. If you invested more over time, CAGR overstates your true performance — you would need XIRR, which weights each cash flow by its date.
Should I subtract inflation?
For a real-terms picture, yes. An 8.45% CAGR during 6% inflation is a real return of roughly 2.45%. That is the number that tells you whether you can buy more than when you started.
Sources
- Standard ROI and CAGR definitions