Glossary

CAGR (compound annual growth rate)

The steady yearly rate that would turn a starting value into an ending value over a period.

CAGR = (ending value ÷ starting value)^(1 ÷ years) − 1. If $10,000 grows to $20,000 in 10 years, the CAGR is about 7.2% a year.

CAGR smooths the path: two investments with the same CAGR can have taken very different routes, one steady and one with deep falls along the way. Read it next to the drawdown.

For investment returns, check whether a CAGR includes dividends and whether it is before or after costs and taxes.

  • Drawdown: The fall from an investment's peak value to its lowest point before it recovers.
  • Backtest: A test of an investment rule on past data, to see how it would have done.

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