By Gabriele Denaro · Published 20 September 2026 · Updated 6 October 2026
A simple average adds up the yearly returns and divides by the number of years. CAGR, the compound annual growth rate, asks something else: what single constant yearly rate would have taken the starting value to the ending value? In words, it is the end value divided by the start value, raised to the power of one over the number of years, minus one.
Gain 50% and then lose 50%: €1,000 becomes €1,500, then €750. The simple average of the two years is 0%, but you are down 25%, and the CAGR is about −13.4% a year. A loss needs a larger percentage gain to be repaired: after losing 50% you need to gain 100% to get back to even.
A steady 7% a year gives an average and a CAGR that match. Now take four years of +40%, −30%, +25% and −10%. The simple average is 6.25%, which sounds fine. €10,000 ends at €11,025, and the CAGR is about 2.5% a year. The more the returns swing, the more the average flatters you.
To describe what actually happened to a sum of money over a period, use the CAGR. The simple average is a rough guide to what one typical year looks like, and it is the number marketing prefers because it is usually larger. When you see a return quoted, ask which one it is.
Both assume no money went in or out along the way. If you made regular deposits, the return on your own money differs from either figure. The calculator below takes a start value, an end value and the years held, and shows the total return and the CAGR side by side, with that assumption in mind.
General educational information, not personal financial, tax or legal advice. It may be incomplete or out of date. Terms of use.