The Formula
ROI = [(Final Value − Initial Investment) / Initial Investment] × 100
Annualized ROI
Annualized ROI = (1 + ROI)^(1/years) − 1
Common Mistakes
- Forgetting to subtract fees and costs from the final value before calculating profit.
- Comparing total ROI across different time periods without annualizing — a 50% ROI over 10 years is far worse than a 20% ROI in 1 year.
- Ignoring inflation — a 5% ROI during 6% inflation is actually a real loss.
Quick Reference
A "good" ROI benchmark for stock market investing over the long run is historically around 7-10% annualized, after inflation.
Frequently Asked Questions
Why annualize ROI at all?
Because a 30% return sounds identical whether it took 1 year or 10 years, but the two are wildly different outcomes. Annualizing lets you fairly compare investments held for different lengths of time.
Does ROI account for risk?
No — ROI is purely a profitability measure. Two investments with identical ROI can carry very different risk levels, which is why serious investors also look at risk-adjusted return metrics.
