What is ROI?
Return on investment (ROI) measures how much you gained or lost compared with the amount you invested. The formula is: ROI = (final value − initial investment) ÷ initial investment × 100.
Why annualized return matters
A 50% return over two years is very different from 50% over ten. The annualized return (also called CAGR) shows the equivalent yearly growth rate: (final ÷ initial)1/years − 1. It lets you compare investments held for different periods.
Limits of ROI
- It ignores risk: a high ROI may have required high risk.
- It ignores taxes, fees and inflation unless you include them in the values.
- Past returns do not guarantee future results.
Frequently asked questions
Can ROI be negative?
Yes. A negative ROI means you lost money.
What is CAGR?
Compound annual growth rate, the steady yearly rate that would produce the same final result.
Should dividends be included?
Yes, add dividends or income received to the final value for an accurate return.