What Is ROI and Why Does It Matter?
ROI (Return on Investment) is the simplest way to measure how well an investment performed. It answers one question: how much did I make relative to what I put in?
The ROI Formula
ROI = (Final Value - Initial Investment) / Initial Investment × 100
For example: you invest $10,000 and it grows to $15,000. ROI = ($15,000 - $10,000) / $10,000 × 100 = 50%.
Simple ROI vs. Annualized ROI
A 50% return sounds great — but over what time frame? 50% in 1 year is incredible. 50% over 20 years is only about 2% per year, which is below inflation. Always annualize when comparing investments held for different periods.
The annualized formula: Annualized ROI = (Final / Initial)^(1/years) - 1
What Is a "Good" ROI?
- Stocks (S&P 500): ~8-10% annualized over the long term
- Real estate: ~8-12% annualized (with leverage)
- Bonds: ~2-4% annualized
- High-yield savings: ~4-5% (as of 2026)
- Gold: ~6% annualized over 50 years, but volatile
Anything above 7% annualized is a solid return. Anything above 15% is exceptional — and likely unsustainable.
ROI Limitations
ROI doesn't account for risk, time value of money, or taxes. Two investments with the same ROI can have vastly different risk profiles. Use ROI as a starting point, not the final word.