How to Evaluate Your ROI
ROI is one of the most important metrics in finance. It helps you understand whether an investment is worth the risk and allows you to compare different opportunities on an equal footing.
Annualized ROI: The Real Picture
A 50% ROI might sound great, but it's very different if it took 1 year versus 10 years to achieve. For long-term investments, always look at the annualized ROI (also known as CAGR):
- 1 Year: 50% ROI = 50% Annualized.
- 5 Years: 50% ROI = 8.45% Annualized.
- 10 Years: 50% ROI = 4.14% Annualized.
Use our compound interest calculator to see how your returns grow over time.
What is a Good ROI?
A "good" ROI depends on the risk and the asset class. For example:
- Stocks: Historically, the S&P 500 has returned about 10% per year.
- Real Estate: Often 5-10% depending on the market and leverage.
- Business Ventures: Usually require a much higher ROI (20%+) to justify the increased risk and time commitment.
- Savings Accounts: Low risk, low ROI (often 1-5%).
ROI vs. ROE
ROI measures the return on the *total cost* of an investment. ROE (Return on Equity) measures the return on the *cash you personally invested*. For example, if you buy a house with 20% down, your ROE will be much higher than your ROI if the house increases in value.