"I made 200% on this investment." Cool — over how long? Because 200% over three years is 44% a year, which is incredible, and 200% over thirty years is 3.7% a year, which loses to inflation. The time window is the whole story.
Two numbers, two questions
- ROI (total return) — "what did this investment make, total?" Good for comparing outcomes on the same investment or the same time window.
- CAGR (compound annual growth rate) — "what rate, compounded yearly, would produce this outcome?" Good for comparing anything with different durations.
The formula
CAGR = (ending / beginning)^(1 / years) - 1. $10,000 → $30,000 over 10 years: 3^0.1 - 1 = 0.1161, or 11.6% per year. Same result over 20 years is only 5.65% per year — half the rate, same total.
Worked comparisons
- +50% in 2 years → 22.5% CAGR. Elite.
- +100% in 7 years → 10.4% CAGR. Market-matching.
- +200% in 10 years → 11.6% CAGR. Market-matching.
- +300% in 30 years → 4.7% CAGR. Underperforming stocks, beating cash.
- +1,000% in 50 years → 4.9% CAGR. Sounds huge, isn’t.
Why cumulative returns mislead
Fund marketing loves "5-year cumulative return: 82%" because it sounds bigger than "12.7% CAGR." Both describe the same performance. CAGR is just the honest way to compare it against a 3-year cumulative or a 10-year cumulative from another fund. Annualize everything.
Enter initial, final, and years. Get total ROI and annualized CAGR side by side.