Compound Annual Growth Rate (CAGR) measures the rate of return of your investment that factors in the compounding effect. It’s our preferred reward measure. When people refer to the S&P 500 having 10% return over the long run, they are typically referring to CAGR.
Other similar performance measures like the Average Annual Return (AAR), which are frequently reported with mutual funds and ETFs, does not take into account of the compounding effect, so their performance “looks better” than they really are. In our opinion, this is another marketing gimmick that’s designed to confuse would-be investors.