compound annual growth rate
Compound annual growth rate is the smooth yearly rate that would have taken an investment from its starting value to its ending value.
In plain English
An investment grew from ₦1 million to ₦2 million in five years. What was the return?
Most people say 100 percent, which is true and useless, because it says nothing about the years. Others divide by five and say 20 percent a year, which is wrong, because it ignores compounding.
The compound annual growth rate is the honest answer. It is the steady yearly rate that would have produced that result if the growth had been perfectly smooth. In this case it is close to 14.9 percent a year, not 20.
Its value is comparison. It lets you place a business, a fund, a property and a treasury bill side by side and compare them honestly, regardless of how long each was held or how bumpy the ride was.
But understand what it hides, because this is where people are misled. It smooths everything. An investment that fell 40 percent, recovered, and finished ahead shows the same CAGR as one that rose gently every year. The number is identical and the experience was nothing alike, and only one of them would have made you sell in a panic.
And always subtract inflation before celebrating. A 15 percent CAGR in a 25 percent inflation environment is a loss dressed as a gain.
Your ₦1 million becomes ₦2 million over five years. That is not 20 percent a year. It is roughly 14.9 percent a year compounded, and the difference matters enormously when you use it to project the next twenty years.
Questions people ask
Why can I not simply divide the total return by the years?
Because that ignores compounding, and it overstates the true annual rate. The difference grows larger over longer periods.
What is a good CAGR?
Anything that comfortably beats inflation over time. In Nigeria that is a far higher bar than in most countries, so compare against inflation rather than against a foreign benchmark.
Does CAGR show risk?
Not at all, and this is its greatest weakness. Two investments with identical CAGRs can have entirely different volatility, and one of them would have made you sell.
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