ROI is gain over cost, as a percent
Return on investment states your profit as a share of what you put in, so investments of any size compare on one scale. The gain is just the final value minus what you paid.
$10,000 in, $12,000 out: (12,000 − 10,000) ÷ 10,000 = 20%. Remember it is a percentage, not a dollar figure — $10K of profit is a great 10% on $100K but a poor 1% on $1M.
Over multiple years, annualize it
Plain ROI hides time. A big total return earned slowly can be worse than a small one earned fast. The annualized return (CAGR) fixes this by asking what steady yearly rate would compound to the same result.
- Do not just divide. A 100% return over 5 years is 14.9% a year, not 20% — compounding does the heavy lifting.
- Compare like with like. +100% over 10 years (about 7.2% a year) is worse than +50% in one year (50% a year), even though 100 looks bigger.
Return benchmarks by asset
| Investment | Typical annual return | Risk |
|---|---|---|
| Savings account | 3–5% | Very low |
| Corporate bonds | 4–6% | Low |
| Real estate | 5–8% | Moderate |
| S&P 500 (long-term) | ~10% | Moderate |
| Bitcoin | 25–30% | Very high |
If your return is below inflation (about 2–3%), you are losing purchasing power even when the number is positive. The Rule of 72 estimates doubling time: 72 ÷ annual return, so 10% doubles your money in about 7.2 years.
What ROI leaves out
- Costs and taxes. A 20% gross ROI can be 16% after a capital-gains tax, less again after broker fees. Quote net where it counts.
- Inflation. A 10% nominal return in 3% inflation is only about 6.8% in real terms.
- Risk. ROI says nothing about how much you could have lost. A high return on a volatile asset is not the same bargain as the same return on a safe one.
Common questions
How do you calculate ROI?
Subtract the cost from the final value to get your gain, divide by the cost, and multiply by 100. Buy for $10,000 and sell for $12,000: the $2,000 gain over $10,000 is a 20% ROI.
What is the difference between ROI and annualized return?
Plain ROI is the total percentage gain, ignoring time. Annualized return (CAGR) spreads that over the years with compounding. A 100% gain over 5 years is 100% ROI but only about 14.9% per year.
What is a good ROI?
It depends on risk. The S&P 500 has returned roughly 10% a year long-term, so that is a common benchmark. Below about 5% barely beats inflation; a 50% return on something volatile like crypto is not comparable to 10% on bonds.
