Average Return Calculator
Return Benchmarks
Key Formulas
CAGR:
(FV/PV)^(1/n) - 1
Geometric Mean:
[(1+r1)(1+r2)...(1+rn)]^(1/n) - 1
Related Calculators
Understanding Investment Returns
Arithmetic vs Geometric Mean
When analyzing investment returns, understanding the difference between arithmetic and geometric mean is crucial. They can give very different results, especially with volatile investments.
Arithmetic Mean
Simple average of returns. Add all returns and divide by the number of periods. Always higher than or equal to geometric mean.
Example: (10% + 20% + -15%) / 3 = 5%
Geometric Mean (CAGR)
Compound annual growth rate. Shows the actual growth rate accounting for compounding. This is what your money actually earned.
Example: Same returns = ~3.6% CAGR
The Volatility Drag
High volatility reduces your actual returns. This is why the geometric mean is always less than or equal to the arithmetic mean when there is any variation in returns.
Example: Volatility Impact
Investment A (Volatile)
Years: +50%, -30%, +50%, -30%
Arithmetic Mean: 10%
CAGR: 2.5%
Investment B (Stable)
Years: +10%, +10%, +10%, +10%
Arithmetic Mean: 10%
CAGR: 10%
Historical Market Returns
| Asset Class | 10-Year CAGR | 30-Year CAGR | Volatility |
|---|---|---|---|
| US Large Cap Stocks | ~12% | ~10.5% | High |
| International Stocks | ~5% | ~7% | High |
| US Bonds | ~1.5% | ~5% | Low |
| Real Estate (REITs) | ~8% | ~9.5% | Medium |
*Historical returns vary by time period and are not guaranteed
Rule of 72
A quick way to estimate how long it takes to double your money: divide 72 by your annual return.
4% Return
18 years
7% Return
10 years
10% Return
7 years
12% Return
6 years
Important Note
Past performance does not guarantee future results. Returns can vary significantly year to year, and average returns may not reflect the sequence of returns, which matters greatly during accumulation and withdrawal phases.
Frequently Asked Questions
What is CAGR and why is it important?
CAGR (Compound Annual Growth Rate) represents the smoothed annual rate of return that would take an investment from its initial value to its final value over a specified period. Unlike simple average returns, CAGR accounts for compounding and shows what your investment actually earned. It's the best metric for comparing investments with different time periods or volatility levels.
Why is geometric mean lower than arithmetic mean for investment returns?
The geometric mean is always less than or equal to the arithmetic mean when there's any variation in returns. This difference, called volatility drag, occurs because losses have a larger impact than equivalent gains. For example, a 50% loss requires a 100% gain to break even. This is why two investments with the same average return but different volatility will have different actual growth.
What is a good average return for a stock portfolio?
The S&P 500 has historically returned about 10-11% annually before inflation (7-8% after inflation) over long periods. However, returns vary significantly by decade and investment type. A diversified portfolio of stocks and bonds might target 6-8% long-term. Individual results depend on asset allocation, fees, timing of investments, and market conditions.
How do I use the Rule of 72?
The Rule of 72 is a quick way to estimate how long it takes to double your money. Simply divide 72 by your expected annual return. At 8% returns, your money doubles in about 9 years (72/8=9). At 6%, it takes 12 years. This rule works best for returns between 6-10% and provides a rough estimate for financial planning.