How to Calculate Investment Returns
Investment return can be measured several ways — total return, annualised return (CAGR), and inflation-adjusted real return. For comparing investments across different time periods, CAGR is the most useful because it accounts for the effect of compounding.
The CAGR Formula
CAGR = (Ending Value / Beginning Value)^(1/Years) − 1. For example, $10,000 growing to $18,000 over 6 years: CAGR = (18,000/10,000)^(1/6) − 1 = 1.8^0.1667 − 1 = 0.1029 = 10.29%. This means the investment grew at a steady 10.29% per year to reach $18,000.
Historical Market Returns
The S&P 500 has returned approximately 10.5% per year over the past 100 years in nominal terms, or about 7.5% after inflation. The FTSE 100 has returned approximately 7–8% nominally. The ASX 200 has averaged around 9–10% including dividends. Past performance doesn't guarantee future results, but these figures are widely used as planning assumptions.
Dollar-Cost Averaging
Rather than investing a lump sum, many investors contribute a fixed amount at regular intervals (monthly, quarterly). This strategy — called dollar-cost averaging — reduces timing risk because you buy more units when prices are low and fewer when prices are high. Our calculator supports both lump sum and regular contribution scenarios.
Frequently Asked Questions
What is CAGR?
CAGR stands for Compound Annual Growth Rate. It represents the steady annual rate of return that would take an investment from its starting value to its ending value over a given time period, assuming returns are reinvested each year. CAGR smooths out year-to-year volatility to give a single comparable growth rate.
What is a good return on investment?
The US stock market (S&P 500) has averaged approximately 10% per year historically (about 7% after inflation). A diversified global portfolio typically returns 7–9%. Bonds return 3–5%. Cash and savings accounts typically return 1–5% depending on central bank rates. A 'good' return depends on the asset class, risk taken and time horizon.
How is CAGR different from average annual return?
Average annual return (arithmetic mean) adds up yearly returns and divides by years. CAGR (geometric mean) accounts for compounding — it shows the constant rate that would produce the same end result. If an investment gained 50% then lost 33%, the average return is 8.5%, but the CAGR is 0% because you're back to the starting point.
What is the difference between nominal and real returns?
Nominal returns are the raw percentage gains before adjusting for inflation. Real returns subtract inflation to show purchasing power growth. If your investment gained 8% and inflation was 3%, your real return was approximately 5%. For long-term planning, real returns are more meaningful — they show what you can actually buy with your gains.
How does the Rule of 72 work?
Divide 72 by the annual return rate to find how many years it takes to double your money. At 6% return, money doubles in 12 years (72÷6). At 9%, it doubles in 8 years. At 12%, in 6 years. This quick mental calculation works well for rates between 4% and 15%.