How it’s worked out
Return on investment is the gain as a share of what went in. The annualised return (also called CAGR, the compound annual growth rate) is the steady yearly rate that would grow the same money to the same amount over the same time:
ROI = (returned − invested) ÷ invested × 100 Annual return = (returned ÷ invested)^(1 ÷ years) − 1
Worked examples
1,000 that becomes 1,500 is an ROI of 50%. Over 3 years that is 14.47% a year; over 10 years only 4.14% a year. 2,000 that falls to 1,700 over 2 years is −15%, or −7.8% a year.
How to read the result
- Return on investment: the whole gain or loss, however long it took.
- A year, compounded: the figure to compare with a savings rate or another investment held for a different time.
- Money multiplied by: what each pound or dollar became.
Common mistakes
- Comparing ROIs over different lengths of time: use the yearly figure.
- Leaving out costs: count fees and the cost of buying in “invested”, and income received in “returned”.
- Using it when money went in or out along the way: then each amount was invested for a different time, and a money-weighted return is needed.
How to use it
- Type everything you put in, fees included.
- Type what it’s worth now or what you got back, with any income it paid.
- Type how many years you held it to see the yearly return.
Questions
How do you calculate ROI?
Take what you invested from what you got back, divide by what you invested and multiply by 100. 1,000 that becomes 1,500 is a 50% return.
What is a good annual return?
It depends on the risk: compare it with what a savings account pays, which is close to risk-free. The yearly figure makes that comparison fair whatever the time held.
What is the difference between ROI and CAGR?
ROI is the total return, ignoring time. CAGR spreads it over the years as a compound yearly rate: a 50% ROI is 14.47% a year over 3 years but 4.14% over 10.
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