ROI and CAGR: Measuring Investment Returns
The difference between total return (ROI) and annualized return (CAGR), how each is calculated, and what they leave out.
Total return (ROI)
ROI is the overall percentage gain: (final value − initial) ÷ initial. It ignores how long you held the investment.
Annualized return (CAGR)
CAGR shows the steady yearly rate that would grow your initial amount to the final value: (final ÷ initial)^(1 ÷ years) − 1. It makes investments of different lengths comparable.
What it leaves out
These figures usually exclude taxes, fees, dividends and inflation, which all affect your real, after-tax return.
FAQ
Which is better to compare?
CAGR, because it normalizes for time. Two investments with the same ROI over different periods have very different CAGRs.
Does CAGR mean returns were steady?
No. It is a smoothed average; actual year-to-year returns can vary widely.
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Last updated: 2026-07-25 · This content is a 2026 reference and may differ from actual rules and rates.