Annualized return = (ending value ÷ beginning value)1/years − 1 for an investment with no intervening external cash flows. This geometric annual growth rate is commonly called CAGR.
When you add or withdraw money during the period, a start-and-end calculation can confuse contributions with performance. Use a cash-flow-aware method such as XIRR to estimate your money-weighted return.
In This Guide
- 1 CAGR: a worked example
- 2 Excel and spreadsheet formulas
- 3 Choose the measure that matches your question
- 4 Deposits are not investment gains
- 5 How to handle dividends and other income
- 6 Nominal versus real return
- 7 Common annualization mistakes
- 8 Why averaging yearly percentages can mislead
- 9 A minimal XIRR worksheet you can reproduce
- 10 A final calculation checklist
- 11 Sources
CAGR: a worked example
A hypothetical $10,000 investment grows to $15,000 over five years, with all investment income reinvested and no additional deposits or withdrawals.
| Measure | Calculation | Result |
|---|---|---|
| Total return | $15,000 ÷ $10,000 − 1 | 50% |
| Annualized return | 1.51/5 − 1 | About 8.45% a year |
Dividing 50% by five gives 10%, which is not the compounded annual result. CAGR asks what constant annual rate would produce the same ending value. It does not mean the investment actually earned 8.45% in each year.
Excel and spreadsheet formulas
If beginning value is in B2, ending value in C2 and years held in D2, use =(C2/B2)^(1/D2)-1 and format the result as a percentage. Positive beginning and ending values are assumed in this basic formula.
For actual dated cash flows, use =XIRR(values,dates). Enter money invested as negative and money received as positive. Include the current or final portfolio value as a positive terminal cash flow on the valuation date. Follow the spreadsheet’s date and sign conventions carefully.
For a more detailed worksheet setup, see the annualized return guide for Excel.
Choose the measure that matches your question
| Question | Method | Main limitation |
|---|---|---|
| How quickly did an untouched investment grow? | CAGR | Does not handle intervening external cash flows |
| What return did my deposits and withdrawals produce? | IRR or XIRR | Depends on timing and complete cash-flow records |
| How did a manager perform apart from investor cash-flow timing? | Time-weighted return | Requires valuations around external cash flows |
A fund’s reported performance and your personal return can differ because you invested different amounts at different times. The difference is not automatically evidence of an error.
Deposits are not investment gains
Suppose an account starts at $10,000, you add $5,000, and it ends at $16,000. The account value rose 60%, but most of that increase came from your contribution. Without the contribution date, a reliable annualized personal return cannot be calculated.
This distinction matters for rental properties too. Renovation spending, additional equity, distributions and sale proceeds can occur on different dates. Record the actual cash flows before choosing a return formula.
How to handle dividends and other income
If income was reinvested and included in ending value, do not add it again. If it was paid out, record the distribution and use a suitable cash-flow method. Counting an income payment both as a distribution and as part of ending assets overstates performance.
Be explicit about fees and taxes. An after-fee account value and a gross benchmark return are not equivalent comparisons. Currency changes also matter when the investment and your spending are denominated in different currencies.
Nominal versus real return
To adjust a nominal annual return for an inflation rate over the same interval, use (1 + nominal return) ÷ (1 + inflation) − 1. With an illustrative 6% nominal return and 3% inflation, the real return is approximately 2.91%, before any further tax adjustment.
For longer periods, align the inflation measure with the full investment period rather than subtracting one year’s inflation from a multi-year result. See calculating investment returns after inflation.
Common annualization mistakes
- Using the arithmetic average of yearly returns instead of compounding.
- Annualizing a short winning trade and treating the result as a forecast.
- Ignoring distributions, fees, withdrawals or terminal value.
- Comparing periods or currencies that do not match.
- Using a precise spreadsheet result built on approximate cash-flow dates.
Annualization standardizes time; it does not standardize risk. Compare the calculation with the investment’s volatility, liquidity and possible permanent loss before drawing a conclusion.
Why averaging yearly percentages can mislead
A hypothetical investment starts at $10,000, gains 50% in the first year and loses 50% in the second. It ends at $10,000 × 1.50 × 0.50 = $7,500. The arithmetic average of +50% and −50% is zero, but the investor lost 25% overall.
The compounded annual result is (0.75)1/2 − 1 = approximately −13.40%. A percentage loss is applied to the larger value reached after the gain. This is why an arithmetic average does not describe the growth of an actual untouched balance.
A minimal XIRR worksheet you can reproduce
For this hypothetical example, an investor contributes $10,000 on January 1, 2025 and values the holding at $12,000 on January 1, 2026. There are no other flows.
| Spreadsheet row | Column A: date | Column B: cash flow |
|---|---|---|
| 2 | =DATE(2025,1,1) |
−10000 |
| 3 | =DATE(2026,1,1) |
12000 |
Enter =XIRR(B2:B3,A2:A3) in another cell and format it as a percentage. The result is 20% for these dates, which are 365 days apart. The positive final value is a valuation entry; the investment does not need to have been sold to calculate a return to that date.
For monthly contributions, add one negative row per actual contribution date and extend both ranges. Add withdrawals as positive rows. Retain just one terminal value on the final valuation date. Transfers between accounts inside the portfolio being measured are internal movements, not new investor deposits or withdrawals.
Microsoft documents XIRR’s actual-date inputs, 365-day convention and requirement for at least one positive and one negative cash flow. Use real spreadsheet dates rather than ambiguous text. Errors can also arise from unmatched ranges or a calculation that fails to converge; a displayed percentage is not proof that the inputs describe the right portfolio.
A final calculation checklist
- Define the account or combined portfolio being measured.
- Match every external flow to its date and sign.
- Include distributions once, either in the balance or as paid-out cash.
- Keep the valuation date and terminal amount consistent.
- Label the result as before or after fees and taxes.
- Compare benchmarks over the same period and in the same currency.
If you have no dated contribution records, start with the wealth plan builder to document future cash flows. The average-return calculator helps explore arithmetic averages; that is a different task from calculating the compounded or money-weighted result of your own account.
Sources
- SEC: understanding financial statements and cash flows
- SEC Investor.gov: investment risk and allocation
- Microsoft: XIRR inputs, dates and calculation conventions
Substantively reviewed October 9, 2026. Examples are hypothetical unless identified otherwise. This is educational information, not personalized investment, tax or legal advice.
