CAGR vs Average Return: Why +50% and −30% Is Not a 10% Gain

By Smart Budget Sheets November 10, 2026

CAGR vs average return, and the spreadsheet formulas (CAGR, XIRR).

Investment returns are often quoted as an average, but your money grows at the compound rate. The difference can be large.

The trap

$10,000 gains 50% in year one ($15,000), then loses 30% in year two ($10,500).

A simpler version: +20% then −20% is not break-even. $10,000 becomes $12,000, then $9,600.

Compound annual growth rate (CAGR) is the steady yearly rate that turns the starting value into the ending value:

CAGR = (ending value / starting value)^(1 / years) − 1

Example: $10,000 grows to $25,000 over 7 years. (25,000 / 10,000)^(1/7) − 1 = about 14.0% a year.

Comparing funds: compare CAGR (often called annualized return) over the same period, not average yearly returns.
Your own portfolio: if you added money along the way, CAGR on the start and end values overstates your return; a money-weighted return (XIRR in a spreadsheet) handles deposits correctly.
Volatility drag: two investments with the same average return end up in different places; the more volatile one usually ends lower.

CAGR: =(B2/A2)^(1/C2)-1, with start value in A2, end value in B2 and years in C2.
With deposits and withdrawals: =XIRR(amounts, dates), entering deposits as negative amounts and the current value as a positive amount on today’s date.

General information, not financial advice. Figures are rounded examples.

#personalfinance #budgeting #investing