The formula
CAGR = (ending ÷ starting)^(1 ÷ years) − 1
$10,000 growing to $18,500 over five years is a CAGR of 13.1%. That is the constant yearly rate which, compounded, would have produced the same ending value.
Fractions of a year are fine — eighteen months is 1.5 — and the result is unchanged by how the growth was distributed. That last property is the whole point and the whole limitation.
What CAGR hides on purpose
CAGR is a smoothed rate. It describes the destination, not the journey.
Two portfolios that both start at $10,000 and end at $18,500 over five years have the same 13.1% CAGR. One might have risen steadily; the other might have gone to $6,000 in year two before recovering. Identical CAGR, and only one of them was still being held at the end — the deepest drawdown is what decides whether an investor stays in the strategy long enough to collect the rate.
So CAGR belongs next to a drawdown figure, not on its own. The recovery arithmetic shows why: the path that fell 40% needed a 67% gain just to return to level, and the CAGR gives no hint that it happened.
Why the benchmark field is here
A CAGR quoted alone cannot be judged. Thirteen percent is excellent in a flat decade and unremarkable in a strong one, and there is no way to tell which from the number itself.
The only reading that means something is the difference against what a simple index holding would have returned over the same years. That is why this calculator asks for a benchmark and prints the gap: it is the difference between "I made 13%" and "I made 3% more than doing nothing", and the second statement is the one that describes skill.
Two honest cautions when you do that comparison. Use the same period for both — a strategy measured over years that happened to suit it will beat any benchmark measured over different ones. And compare after costs, because fees and spreads come out of your figure and not out of the index's.
Where CAGR should not be used
On a trading account with deposits and withdrawals. CAGR compares two balances, so money you added looks identical to money you earned. A deposit will inflate the rate and a withdrawal will destroy it, and neither has anything to do with performance. Use a time-weighted return where cash flows exist.
On short periods. A quarter annualised is a projection, not a measurement — the smaller the window, the more the figure is describing noise.
As a forecast. CAGR is a description of what happened. The compounding calculator projects forward on an assumed rate, and it carries the same warning: the assumption that the rate repeats is the part that breaks.