Annualized Return vs CAGR
Annualized return and CAGR are often used interchangeably, but they are not always the same. Understanding the difference helps you compare investments more accurately.
Key difference
CAGR assumes smooth compounding over time, while annualized return may reflect the actual average yearly return depending on how it is calculated. In many simple cases, they are identical, but in more complex scenarios they can differ.
When they are the same
- single investment period
- no irregular cash flows
- consistent compounding
When they differ
- irregular contributions
- varying returns year-to-year
- real-world portfolio performance
Which should you use?
Use CAGR when you want a clean, comparable growth rate. Use annualized return when working with real-world data that includes variation, contributions, or non-uniform growth.