Free Average Return & CAGR Calculator

Q: What is the difference between Arithmetic and Geometric average return?

The Arithmetic Average Return is the simple average of a series of returns (e.g., (10% + 20%) / 2 = 15%). It is useful for forecasting a likely return in a single future period. The Geometric Average Return, or Compound Annual Growth Rate (CAGR), accounts for the effect of compounding over time. It represents the constant annual return an investment would have needed to achieve its final value. For volatile investments, CAGR is the most accurate measure of true performance.

Q: Why is the Geometric Mean (CAGR) usually lower than the Arithmetic Mean?

CAGR is lower because it accounts for volatility and the effect of compounding on a changing investment base. The arithmetic mean can be misleading. For instance, a 100% gain followed by a 50% loss results in a 0% arithmetic mean. However, an initial $100 would grow to $200 and then fall back to $100, for a true return of 0%. The geometric mean (CAGR) correctly calculates this 0% return, while the arithmetic mean would misleadingly suggest a 25% average gain.

Q: What is a good average rate of return on investments?

A 'good' average rate of return depends heavily on the investment type, risk tolerance, and market conditions. Historically, the S&P 500 has an average annual return of around 10%. Conservative investments like government bonds might return 2-5%, while aggressive investments in tech stocks or venture capital aim for much higher returns but come with significantly higher risk. It's crucial to benchmark your returns against a relevant index (like the S&P 500 for US stocks) and your personal financial goals.

Q: Can I use this calculator for my entire portfolio?

Yes. To calculate the average return for your entire portfolio, simply use the total value of your portfolio as the 'Initial Balance' and 'Final Balance' for each period. This will give you a consolidated view of your overall investment performance.

How to Use the Average Return Calculator

Get a clear picture of your investment returns in four simple steps:

Add Periods: The tool starts with two periods. Click '+ Add Another Period' for each extra year you want to analyze.
Enter Balances: For each row, type the Initial Balance (value at the start of the period) and the Final Balance (value at the end).
Click Calculate: Hit the 'Calculate' button to process your numbers.
Analyze Results: The tool will instantly provide the Arithmetic and Geometric (CAGR) returns, showing the simple average versus the true compounded growth.

Understanding Your Investment's True Performance

When you evaluate an investment over several years, a simple average of the annual returns can be dangerously misleading. This calculator provides two distinct methods for calculating average return, giving you a complete and accurate understanding of your investment's growth journey.

Arithmetic Mean vs. Geometric Mean (CAGR)

Understanding the difference between these two metrics is crucial for any serious investor. They tell very different stories about your money.

Arithmetic Mean (Simple Average): This is the straightforward average of each period's return. It answers the question: "What was the most likely return in any single year?" It can be useful for forecasting, but it often overstates the actual performance of a volatile investment because it ignores the effects of compounding.
Geometric Mean (CAGR): The Compound Annual Growth Rate is the gold standard for measuring performance. It answers the question: "What constant annual rate of return would I have needed to grow my investment from its starting value to its ending value?" The CAGR is the most accurate measure of an investment's historical performance because it accounts for volatility and compounding.

Why Volatility Makes CAGR Essential: A Clear Example

Imagine you invest $1,000.

Year 1: You have a fantastic year with a 100% gain. Your investment is now worth $2,000.
Year 2: The market corrects, and you suffer a 50% loss. Your investment is now worth $1,000.

The Arithmetic Mean would be (+100% - 50%) / 2 = 25% per year. This suggests you made a healthy profit. But did you? You started with $1,000 and ended with $1,000. Your actual gain is zero.
The Geometric Mean (CAGR) correctly calculates your true return as 0% per year, reflecting reality. This is why for measuring what actually happened, CAGR is the superior metric.

Global Benchmarks and "Good" Returns

A "good" rate of return is relative. It depends on your goals, risk tolerance, and the broader market. It is essential to compare your performance to a relevant benchmark.

United States: The S&P 500 has a historical average annual return of roughly 10%.
United Kingdom: The FTSE 100 has different historical averages, often influenced by dividends.
Global Markets: An index like the MSCI World provides a benchmark for a globally diversified portfolio.

Conservative investments like bonds may yield 2-5%, while aggressive strategies target higher returns but accept higher risk. Always measure your CAGR against the right yardstick.

Frequently Asked Questions

What is the difference between Arithmetic and Geometric average return?

The Arithmetic Average is a simple average of periodic returns. The Geometric Average (CAGR) calculates the constant annual growth rate, accounting for compounding. CAGR is a more accurate measure of an investment's true performance over time, especially with volatility.

Why is the Geometric Mean (CAGR) usually lower than the Arithmetic Mean?

The geometric mean is lower because it accounts for volatility. Volatility creates a "drag" on compound returns. The arithmetic mean ignores this effect and can be misleadingly high. The only time they are equal is when the return for every period is exactly the same.

What is a good average rate of return on investments?

A "good" return depends on the asset class and risk. Historically, the S&P 500 averages around 10% annually. Bonds are lower (2-5%), while high-risk ventures aim higher. Benchmarking against relevant indexes is key to evaluating your performance.

Can I use this calculator for my entire portfolio?

Absolutely. To find your portfolio's overall return, use its total value for the 'Initial Balance' and 'Final Balance' in each period. This provides a consolidated view of your investment strategy's performance.

Average Return Calculator

Arithmetic Mean Return

Geometric Mean Return