What is return on investment?
Return on investment (ROI) shows how much an investment earned compared with what it cost: ROI = (amount returned − amount invested) ÷ amount invested. It is a quick way to compare stocks, real estate, a business project or a marketing campaign.
Annualized ROI
ROI alone ignores time: 100% over 2 years is far better than 100% over 10 years. The annualized ROI turns the total into a yearly rate: (amount returned ÷ amount invested)1/years − 1. It lets you compare investments held for different lengths of time.
Example
You invest $1,000 and get back $2,000 after 2.5 years. The gain is $1,000, the ROI is 100%, and the annualized ROI is 31.95% a year. If it took 5 years instead, the annualized ROI would be only 14.87%.
Limits of ROI
- It does not include risk: a high ROI may come with a high chance of loss.
- It needs all the costs: leave out fees, taxes or your time and the ROI looks better than it is.
- With money added or taken out over time, use the IRR or the Average Return Calculator instead.
Frequently asked questions
What is a good ROI?
It depends on the risk and the time. The stock market has returned about 10% a year on average over the long run, so many investors compare against that.
Can ROI be negative?
Yes. If you get back less than you put in, the ROI is negative: $1,000 that becomes $800 is an ROI of −20%.
What is the difference between ROI and annualized ROI?
ROI is the total gain over the whole time. Annualized ROI is the yearly rate that gives the same gain, so it accounts for how long the money was invested.
How is the length counted with dates?
Whole years between the dates, plus the remaining days as a share of that year, so a leap year counts correctly.