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Investing"I doubled my money" sounds like a triumph — until you learn it took 25 years. ROI (return on investment) is the simplest profitability measure in finance, and also the most abused. Here's how to compute it correctly and what it hides.
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The ROI formula
ROI = (Net profit ÷ Cost of investment) × 100
— net profit = total returns − cost − fees —
— net profit = total returns − cost − fees —
Buy stock for $10,000, pay $50 in fees, sell later for $12,000: net profit = $12,000 − $10,050 = $1,950, and ROI = 1,950 ÷ 10,050 ≈ 19.4%. Notice fees belong in the cost — skipping them is how advertised returns get inflated.
Worked examples across investments
| Investment | Cost | Return | ROI |
|---|---|---|---|
| Stock trade | $5,000 + $20 fees | $6,500 | ~29.5% |
| Rental (cash-on-cash) | $40,000 down + closing | $4,800/yr net rent | 12%/yr |
| Small business | $25,000 startup | $8,000/yr profit | 32%/yr |
Real estate investors often use cash-on-cash ROI (annual cash flow ÷ cash invested) because mortgages leverage a small down payment into returns on the whole property — which also magnifies losses.
The time trap: always annualize
A 20% ROI over one year is excellent. A 20% ROI over five years is roughly 3.7% per year — worse than a savings account. The fix:
Annualized ROI = (1 + ROI)1 ÷ years − 1
— compare only annualized returns across investments —
— compare only annualized returns across investments —
Five traps that mislead
- Ignoring time. As above — never compare raw ROIs with different horizons.
- Ignoring risk. A 30% ROI on a volatile trade isn't comparable to 30% on rental income. Risk-adjusted return is the real score.
- Ignoring taxes and fees. Returns quoted before taxes, management fees, and maintenance aren't returns.
- Ignoring inflation. A 5% ROI when inflation is 4% is a 1% real return.
- Survivorship bias. You hear about the 10× winners; the total losses never make it into the anecdote.
ROI is a starting point for comparison, not a verdict. Good investors ask the follow-up questions: over how long, at what risk, after what costs, and in real (inflation-adjusted) terms?
Frequently asked questions
ROI = (net profit ÷ cost of investment) × 100. Net profit is total returns minus the original cost and all fees. So a $10,000 investment that returns $12,000 after fees has an ROI of (12,000 − 10,000) ÷ 10,000 = 20%.
There's no universal "good" — it depends on the asset, timeframe, and risk. Broad stock market indexes have historically returned roughly 7–10% per year before inflation. A rental property might target 8–12% cash-on-cash annually. Compare any ROI to the risk taken and to what a low-risk alternative would have earned.
Simple ROI ignores time: 20% over one year and 20% over five years look identical. Annualized ROI converts the return to a yearly equivalent — roughly (1 + ROI)^(1/years) − 1 — so investments with different timeframes can be compared fairly. Always annualize before comparing.
ROI ignores time, risk, taxes, fees, inflation, and opportunity cost. A 30% ROI on a risky trade isn't comparable to a 30% ROI on a rental property — the risk profiles are worlds apart. ROI is a starting point for comparison, not a complete verdict.
Disclaimer: Calculator content is for education and planning only — not financial advice. Loan terms, rates, fees and tax rules vary by lender and country; confirm important figures with your lender or a licensed financial adviser before deciding.