What Is CAGR? Formula, Calculation Examples & Why Every Investor Needs to Know
•By Shazwan Ismaon
Artikel ini juga tersedia dalam Bahasa Melayu
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You've probably seen the term "CAGR" in company annual reports, IPO stock analyses, or investment fund performance comparisons. But what does CAGR actually mean, and why is it important for investors in Malaysia?
CAGR, or Compound Annual Growth Rate, is the annualized compounded growth rate that shows how much your investment grows each year on average - taking into account the effects of compounding. Unlike simple average returns, CAGR provides a more accurate picture of your long-term investment's actual performance.
In this article, we'll break down the CAGR formula, walk through step-by-step calculations, explore real examples using EPF and Bursa Malaysia data, and highlight common mistakes investors make when comparing investment returns.
CAGR stands for Compound Annual Growth Rate. It measures the annual growth rate of an investment over a specific period, assuming that profits are compounded (reinvested) every year.
Think of it this way - if you invest RM10,000 and after 5 years it becomes RM16,000, CAGR tells you that your investment grew at a consistent rate each year to reach that amount. It "smooths out" the annual fluctuations and gives you a single, easy-to-understand figure.
CAGR differs from actual annual returns because in reality, investments don't grow at the same rate every year. Some years see big gains, others see losses. CAGR ignores this volatility and gives you one "smoothed" number that represents overall performance.
The CAGR formula is as follows:
CAGR = (Ending Value / Beginning Value) ^ (1 / Number of Years) - 1
Or in mathematical notation:
CAGR = (FV / PV)^(1/n) - 1
Where:
Let's say you invested RM10,000 in a fund in 2021, and by 2026 (5 years later), your investment is worth RM14,500.
CAGR = (14,500 / 10,000) ^ (1/5) - 1
CAGR = (1.45) ^ (0.2) - 1
CAGR = 1.0772 - 1
CAGR = 0.0772 or 7.72%
This means your investment grew at an average compounded rate of 7.72% per year over those 5 years.
To better understand CAGR, let's look at real examples using popular investment instruments in Malaysia.
EPF has delivered an average dividend of around 5.91% over the past 10 years. For the 2025 financial year, EPF announced a 6.15% dividend for Conventional Savings with a total distribution of RM79.6 billion.
If you had RM50,000 in EPF savings in 2016, with a CAGR of approximately 5.91%:
2026 Value = RM50,000 x (1 + 0.0591)^10 = RM88,600 (estimate)
This demonstrates the power of compounding - your money nearly doubled in 10 years without any additional contributions.
The FBMKLCI index recorded a cumulative price return of approximately 31.8% over 10 years, which translates to a CAGR of about 2.8% per year.
This figure excludes dividends. When dividends are included, the total return would be higher. This also shows why investors on Bursa Malaysia need to pay attention to stocks that pay consistent dividends, rather than relying solely on price appreciation.
For comparison, the S&P 500 recorded a CAGR of approximately 15.62% over the last 10 years (including reinvested dividends). The long-term historical average for the S&P 500 is around 10.4% per year over 100 years.
| Instrument | 10-Year CAGR (Estimate) | Notes |
|---|---|---|
| EPF (Conventional) | ~5.91% | Dividends only, no additional contributions |
| FBMKLCI (price only) | ~2.8% | Excluding dividends |
| S&P 500 (total return) | ~15.62% | Including reinvested dividends |
| ASB | ~5.5-6.0% | Based on 10-year average dividend |
Many investors make the mistake of using simple average returns to evaluate investment performance. CAGR provides a far more accurate picture, and the following example shows why.
Let's say you invested RM10,000 in a stock:
Simple average return: (100% + (-50%)) / 2 = 25%
Looks great, right? An average return of 25% per year! But in reality, you made no profit at all. Your money is still RM10,000.
CAGR: (10,000 / 10,000)^(1/2) - 1 = 0%
CAGR shows the actual reality - you made zero profit. This is why CAGR is more meaningful than simple average returns, especially for long-term investments that experience volatility.
| Situation | Best Metric |
|---|---|
| Comparing 2 funds' performance over 5 years | CAGR |
| Measuring long-term portfolio growth | CAGR |
| Looking at one year's return only | Actual annual return |
| Comparing monthly returns | Average return |
| Planning for retirement | CAGR |
CAGR isn't just a mathematical formula - it's a practical tool that can help you make smarter investment decisions.
With CAGR, you can fairly compare investments with different time periods. For example, comparing a fund that's been around for 3 years with one that's been around for 7 years - CAGR "levels the playing field" across different time periods.
When analyzing stocks or IPOs on Bursa Malaysia, CAGR is commonly used to evaluate a company's revenue and profit growth. For instance, if Company A records a revenue CAGR of 20% over 3 years, it means the company's revenue has been growing consistently and significantly.
You can use CAGR to calculate how long it takes for your money to double. The well-known shortcut is called the Rule of 72:
Years to double = 72 / CAGR (%)
Example: If your investment's CAGR is 6%, your money will double in 72/6 = 12 years.
CAGR helps you assess whether a fund manager is truly generating good returns compared to the benchmark. If a fund's 5-year CAGR is 4% but the FBMKLCI's CAGR over the same period is 5%, that fund manager has actually underperformed the market.
While CAGR is an extremely useful metric, it has several limitations you need to understand.
CAGR produces a single "smooth" number and doesn't reveal how volatile or risky the investment actually was. Two investments can have the same CAGR but very different journeys.
Example:
Both might produce a similar CAGR of around 10%, but Investment B is far riskier.
CAGR only considers the beginning value and ending value. It doesn't care what happened between those two points. Therefore, choosing different start and end dates can produce very different CAGR results.
CAGR assumes the investment grows at a consistent rate every year, whereas in reality, investments constantly fluctuate. This can create unrealistic expectations if used for future projections.
For periods of less than 3 years, CAGR may not provide a meaningful picture because the timeframe is too short and can be influenced by market anomalies.
You don't need to calculate CAGR manually. Here are some easy methods:
Excel formula: = (Ending_Value/Beginning_Value)^(1/Years) - 1
Example: = (14500/10000)^(1/5) - 1 will return 0.0772 or 7.72%
You can also use the RATE function in Excel:
= RATE(5, 0, -10000, 14500) to get the same result.
Many websites provide free CAGR calculators where you simply enter the beginning value, ending value, and number of years.
When reading stock analysis reports on Bursa Malaysia, CAGR frequently appears in several contexts:
For example, in an analysis of consumer stocks on Bursa Malaysia, companies like Nestle Malaysia recorded an EPS CAGR of around 6% with ROE exceeding 90%.
ROI (Return on Investment) measures the total overall return without considering the time period. CAGR takes into account both time and compounding, making it more suitable for comparing long-term investments.
Generally, a CAGR of 7-10% per year is considered good for long-term equity investments. EPF targets dividends above 5% annually, while the S&P 500 has historically delivered an average of around 10% per year.
Yes. If your investment value decreases from the initial value, CAGR will be negative. For example, if RM10,000 becomes RM7,000 after 3 years, the CAGR is -11.2%.
Not exactly. Compounding is the process where returns are generated on previous returns. CAGR is the growth rate that assumes compounding occurs annually. CAGR is a measurement tool, while compounding is a growth mechanism.
CAGR allows you to project your investment value into the future. For example, if you invest RM100,000 with an expected CAGR of 6%, in 20 years it will be approximately RM320,000 - this helps you plan whether your savings are sufficient for retirement.
Not necessarily. A high CAGR doesn't mean low risk. Volatile investments can have a high CAGR but with significant risk of losses at any time. Always look at CAGR alongside other risk metrics such as standard deviation.
Yes, and this is one of CAGR's best uses. EPF with a CAGR of around 5.91% can be directly compared with the CAGR of individual stocks, unit trust funds, or market indices like FBMKLCI to see which delivers better returns over the same period.
You can obtain historical stock price data from platforms like Bursa Malaysia Market Place, Yahoo Finance, or through your broker. For stocks on Bursa, use the adjusted close price that accounts for stock splits and dividends.
CAGR is one of the most important metrics every investor needs to understand. It provides a clear picture of actual long-term investment performance, helps you compare different instruments fairly, and enables more accurate financial planning. However, don't use CAGR in isolation - combine it with other metrics for a complete picture.
If you already understand how to use CAGR to evaluate investments, the next step is to start building your own investment portfolio.
Open a CDS trading account to start investing on Bursa Malaysia as well as international stocks in the US and Hong Kong markets through our CDS account opening page.
Download our free Stock Market Basics ebook at our Ebook page to learn more about fundamental and technical analysis.