Compound Annual Growth Rate — the rate at which an investment would grow if it grew at a constant rate each year. It's identical to the geometric mean return. A $10,000 investment worth $16,105 after 5 years has a CAGR of 10% (geometric mean = 10%).

What is volatility drag?

The difference between arithmetic mean and geometric mean is called volatility drag. Higher volatility means bigger swings, and bigger swings reduce the geometric mean relative to arithmetic. A portfolio averaging ±40% annually may have a 0% geometric mean despite a positive arithmetic mean.

What is a good average annual return?

The S&P 500 has averaged approximately 10% annualized (arithmetic) or about 10.7% geometric mean over the past century. A diversified portfolio targeting 7% real return (after inflation) is a common planning assumption. Individual stocks vary wildly.

How do I calculate returns if I made contributions?

Use the time-weighted return (TWR) or money-weighted return (IRR/MWR). The geometric mean works for buy-and-hold scenarios with no cash flows. For accounts with ongoing contributions or withdrawals, your financial institution typically shows TWR in performance reports.

Average Return Calculator — Geometric Mean of Annual Returns | KalkWise

By the KalkWise Editorial Team Reviewed for accuracy Updated June 2026

What is the average return calculator — geometric mean of annual returns?

In short

The geometric mean (CAGR) is the true average annual return because it compounds correctly. A portfolio that returns +50% in year 1 and −50% in year 2 has an arithmetic mean of 0%, but the geometric mean is −13.4% (you end with $75K from $100K). Always use geometric mean to evaluate investment performance.

Calculates arithmetic mean, geometric mean (CAGR), and total return from a series of annual investment returns.

How to use this calculator

1Enter annual return percentages for each year (e.g., 10, -5, 15, 8, -3).
2The calculator shows arithmetic mean, geometric mean (CAGR), and total compounded return.
3Use geometric mean to compare different investment periods accurately.

The formula

geometric mean=(∏(1+rᵢ))¹ⁿ1−1

total return=∏(1+rᵢ)−1

Arithmetic Mean = Σrᵢ ÷ n; Geometric Mean = (∏(1+rᵢ))^(1/n) − 1; Total Return = ∏(1+rᵢ) − 1

r₁..rₙ: — Annual returns
n: — Number of years

Worked example

The scenario

5-year returns: +20%, −10%, +15%, +5%, −8%.

gives

The result

Arithmetic mean = 4.4%. Geometric mean (CAGR) = 3.6%. Total compounded return = +19.2%.

Common use cases

Evaluate true long-term portfolio performance.
Compare two funds with different annual return histories.
Check if returns beat inflation or benchmark indices.
Understand how volatility drag reduces actual returns below arithmetic average.

Limitations & assumptions

Historical returns do not predict future performance.
Does not account for deposits, withdrawals, or dollar-cost averaging.
Tax drag and fees can significantly reduce actual realized returns.
Sequence-of-returns risk matters for retirement — the order of returns affects wealth, not just the average.

Frequently asked questions

Arithmetic mean assumes returns don't compound — it overcounts performance. A simple example: +100% then −50% = arithmetic mean of 25%, but you end where you started (geometric mean = 0%). Geometric mean reflects what actually happens to money over time.

Disclaimer: KalkWise calculators are provided for general informational and educational purposes only and do not constitute financial, investment, tax, or legal advice. Results are estimates based on the figures you enter and the assumptions described above. Actual outcomes will vary. Consult a qualified professional before making financial decisions.

Annual Returns