The ROI formulas
Simple ROI
- Final value
- What the investment is worth now, plus any income received
- Total cost
- Purchase price plus fees and any additional costs
Annualised ROI
Simple ROI ignores time, which makes it nearly useless for comparison. A 50% return is excellent over one year and mediocre over ten. Annualised ROI — mathematically the same thing as CAGR — fixes this:
- n
- Holding period in years, including fractions
A worked example
The annualised figure is the one to compare against a savings rate, an index fund or another opportunity.
What ROI does not tell you
- Risk. A 15% return from government bonds and 15% from a single stock are not equivalent. ROI is blind to volatility.
- Cash flow timing. If money went in or out at different points, ROI misleads. Use IRR instead.
- Inflation. An 8% nominal return with 6% inflation is a 1.9% real return. Compare like with like.
- Opportunity cost. A 6% return is only good if the alternative was worse.
- Tax. Returns here are pre-tax. Capital gains treatment varies sharply by asset and holding period.
For investments with regular contributions rather than a single lump sum, the investment calculator is the right tool. For loans and financing decisions, use the loan calculator.
Frequently asked questions
What is a good ROI?
It depends entirely on risk and horizon. Broad stock market indices have averaged roughly 7% to 10% a year over long periods. Bonds return less; individual businesses and property vary enormously.
The right benchmark is what you could have earned in a low-cost index fund with less effort. If an investment does not beat that after adjusting for risk, it is not doing its job.
What is the difference between ROI and annualised ROI?
ROI is the total percentage gain over the whole holding period, ignoring how long that took. Annualised ROI expresses it as an equivalent yearly rate, which is what makes comparison possible.
A 50% total return over three years is 14.47% a year. Over ten years, the same 50% is only 4.14% a year.
Can ROI be negative?
Yes. If the final value plus income is less than the total cost, ROI is negative. A −30% ROI means you lost 30% of what you put in.
Note that recovering from a loss requires a larger percentage gain: a 50% loss needs a 100% gain to break even.
Should I include fees in the ROI calculation?
Yes, always. Brokerage, management fees, stamp duty, maintenance and transaction costs all reduce your actual return. Excluding them produces a number that flatters the investment.
Use the additional costs field above to include them.