CAGR vs. average return: why the numbers differ
The average (arithmetic mean) adds up each year’s return and divides by the number of years. The CAGR (compound annual growth rate, or annualized return) is the steady yearly rate that would turn your starting money into your ending money. Volatility drags the CAGR below the average: a +50% year followed by a −50% year averages 0%, but leaves you down 25%. Your wealth grows at the CAGR, so that’s the number that matters for planning.
- The long-run pattern. Since 1926 the S&P 500 has compounded at roughly 10% a year with dividends reinvested, or about 7% after inflation.
- Dividends matter. Turn off “Reinvest dividends” to see how much of the market’s return came from dividends rather than price gains.
- High inflation hurts. Try 1966–1981 with inflation adjustment on: stocks barely kept pace with rising prices.
Where the data comes from
Annual returns from 1871 come from Professor Robert Shiller’s historical U.S. market data (the S&P Composite and its predecessors), with recent years from S&P Dow Jones Indices. Inflation uses the December-to-December Consumer Price Index from the U.S. Bureau of Labor Statistics. Figures for the latest year may be revised slightly. See the methodology for formulas.
CAGR = (ending value ÷ starting value)1/years − 1