Two portfolios can post the exact same average return and still land in very different places. Here's why the geometric return — your compound annual growth rate (CAGR) — is the number that actually pays your bills, and a calculator to find yours.
The arithmetic return is the plain average of your yearly results — add them up, divide by the number of years. It's easy to quote and it's what shows up in a lot of marketing. The trouble is that it quietly ignores the order and the swings of those returns.
The geometric return (CAGR) is the single steady rate that would actually have grown your money from where it started to where it ended. It accounts for compounding — the fact that a loss is measured against a smaller base and a gain against a larger one.
Because losses hurt more than same-sized gains help, the geometric return is always less than or equal to the arithmetic one. They're only equal when every year is identical. The bigger the swings, the wider that gap grows — a drag on your wealth that the simple average never shows you.
The arithmetic average is a tidy 0%. But you're down $2,500 — a real, compounded loss of −13.4% a year. Same "average," very different destination.
A calm 7% every year and a bumpy path that averages 7% start at the same $10,000 and share the same headline number — but the volatility quietly bleeds off returns along the way.
Identical 7.0% average return. The steady line compounds to 7.0% a year; the volatile line, despite an early lead, compounds to just 5.1% a year — a roughly $3,200 shortfall. That difference is the cost of volatility.
Both paths start at $10,000 and post the same 7.0% average annual return. The steady column earns 7% every year; the volatile column swings but averages the same — yet ends lower once you follow the balances down the page.
Enter a starting amount, choose how many years you're measuring, then drop in each year's return. We'll show your true CAGR next to the simple average — and what the gap cost.