Average Return Calculator
0.00% average annual return (CAGR)
| Year | Return | Contribution | Ending Balance |
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Arithmetic Mean vs. Geometric Mean: Why They Differ
The arithmetic mean simply averages your yearly percentage returns, but it overstates what you actually earned because it ignores compounding. The geometric mean (also called CAGR, or compound annual growth rate) accounts for the fact that gains and losses compound on top of each other — a 50% loss followed by a 50% gain does not get you back to even, it leaves you down 25%. For judging real investment performance over multiple years, the geometric mean is the more accurate figure, and it will always be equal to or lower than the arithmetic mean whenever returns vary from year to year.
Why Volatility (Standard Deviation) Matters
Two investments can have the same average return yet very different risk profiles. Standard deviation measures how much individual yearly returns swing around the average — a higher number means a bumpier ride, even if the long-run average looks similar. This is a key reason two portfolios with identical arithmetic means can end up with noticeably different geometric (compounded) returns: the more volatile one usually compounds to a lower ending balance, a phenomenon sometimes called "volatility drag."
Putting Average Returns to Work
Once you know your realistic compound growth rate, you can plug it into a compound interest calculator or an investment calculator to project future balances under steady contributions. Note: this calculator assumes any annual contribution is added at the start of each year, before that year's return is applied — a common simplifying convention — so adjust your inputs if your actual contribution timing differs.
Frequently Asked Questions
What is the difference between average return and CAGR?
The plain average (arithmetic mean) adds up each year's percentage return and divides by the number of years, but it ignores compounding. CAGR (the geometric mean) accounts for how gains and losses build on each other over time, so it reflects the actual compounded growth rate of your money and is almost always lower than the arithmetic average when returns are volatile.
Why is my geometric mean return so much lower than my arithmetic mean?
The bigger the swings between your yearly returns, the larger the gap between the two figures. This happens because percentage losses and gains are not symmetric in dollar terms — for example, averaging a +50% year and a -50% year gives an arithmetic mean of 0%, but the actual compounded result is a 25% loss. Higher volatility (shown here as standard deviation) always pulls the geometric mean further below the arithmetic mean.