Return on Investment (ROI) is the most widely used metric for evaluating whether an investment was profitable. The formula is straightforward: (Gain from Investment − Cost of Investment) ÷ Cost of Investment × 100. If you invest $10,000 and sell for $13,000, your ROI is 30%.
But simple ROI has a critical flaw: it ignores time. A 30% return in one year is excellent; a 30% return over 10 years is mediocre. That is why annualized ROI (also called CAGR — Compound Annual Growth Rate) is the better metric for comparing investments with different time horizons.
Simple ROI vs Annualized ROI
Understanding the difference between these two metrics is essential:
- Simple ROI: Total return as a percentage of the original investment. Quick and intuitive but does not account for the holding period. Formula: (Final Value − Initial Value) ÷ Initial Value × 100.
- Annualized ROI (CAGR): The equivalent annual return that would produce the same total gain over the holding period. Allows apples-to-apples comparison across different timeframes. A $10,000 investment that grows to $13,000 in 3 years has a CAGR of about 9.1% per year.
Benchmarking Your Returns
An ROI number means little without context. Compare your returns against relevant benchmarks:
- S&P 500: ~10% average annual return (nominal) over the last century. This is the standard benchmark for stock investments.
- Bonds (U.S. Aggregate): ~4–5% average annual return. The benchmark for fixed-income investments.
- Real estate: ~3–4% average annual appreciation nationally, plus rental income of 4–8% gross yield.
- High-yield savings: 4.0–4.5% APY in 2026. The risk-free benchmark for short-term comparisons.
- Inflation: ~3% long-term average. Any investment returning less than inflation is losing real purchasing power.
ROI for Different Investment Types
ROI applies to far more than stocks. Here is how to think about returns across asset classes:
- Stock market: Include dividends reinvested for total return. A stock bought at $50 that rises to $60 with $2 in dividends has an ROI of 24%, not just 20%.
- Real estate: Include rental income, appreciation, tax benefits, and subtract all costs (mortgage interest, taxes, insurance, maintenance, vacancy). Net ROI on rental properties typically ranges from 6–12% annually.
- Business investments: Calculate total revenue generated minus total costs. Include opportunity cost — the return you could have earned investing the same money elsewhere.
- Education: Compare the cost of a degree (tuition, lost wages) against the salary increase it enables. A $100,000 degree that increases lifetime earnings by $500,000 has a 400% ROI.
Common ROI Mistakes
Avoid these errors that lead to misleading return calculations:
- Ignoring fees and costs: Investment fees, transaction costs, and taxes reduce your actual return. A fund returning 8% with a 1% expense ratio only nets you 7%.
- Forgetting inflation: A 5% nominal return with 3% inflation is only a 2% real return. Always consider inflation-adjusted ROI for long-term comparisons.
- Cherry-picking time periods: Measuring from a market low to a high exaggerates returns. Use consistent, meaningful time periods.
- Ignoring opportunity cost: A real estate investment returning 6% sounds good until you realize the stock market averaged 10% in the same period. Your true economic gain is the difference.
- Survivorship bias: Only looking at winners. The average includes investments that went to zero — factor in risk of loss when evaluating expected ROI.
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Frequently Asked Questions
What is a good ROI?
It depends on the asset class and risk level. For stocks, 8–12% annual returns are historically normal. For real estate, 6–12% total return (appreciation plus rental income) is solid. For a business investment, 15–25%+ ROI is typically expected to justify the risk and effort. Any investment should at minimum beat inflation (3%) and ideally beat a risk-free alternative like high-yield savings (4–4.5% in 2026).
How do I calculate ROI on a rental property?
Calculate annual net rental income (gross rent minus all expenses: mortgage interest, property taxes, insurance, maintenance, property management, vacancy allowance). Divide net income by your total cash invested (down payment plus closing costs plus any renovations). For example, $8,000 net income on a $100,000 investment equals an 8% cash-on-cash ROI. Add property appreciation for total return.
What is the difference between ROI and CAGR?
ROI is the total percentage gain over the entire holding period. CAGR (Compound Annual Growth Rate) is the annualized equivalent return. An investment that doubles in 7 years has a 100% ROI but a 10.4% CAGR. CAGR is more useful for comparing investments held for different lengths of time. Our ROI Calculator shows both metrics.
Should I always choose the investment with the highest ROI?
No — you must also consider risk. Higher returns typically come with higher risk. A speculative stock may promise 30% ROI but could also lose 50%. A Treasury bond offers only 4% but is virtually risk-free. The Sharpe ratio (return per unit of risk) is a better comparison metric. Diversification across multiple investments with different risk-return profiles is the most reliable strategy.