Just like a seasoned sailor navigates through the vast sea using a compass, a savvy investor uses the return on investment (ROI) as a key compass in navigating the sea of financial decisions. But, what makes a good ROI? Understanding what constitutes a good ROI is crucial for making sound financial choices, whether that’s investing in stocks, bonds or real estate. That strong ROI is going to vary by investment and time period. You may want to work with a financial advisor for the best potential ROI on your portfolio investments.
What Is Return on Investment (ROI)?
ROI is a performance measure used to evaluate the efficiency or profitability of an investment. The higher the ROI, the better the investment is perceived to be performing. If we compare investing to sailing again, consider ROI as the direction of wind – the stronger it blows, the faster it helps you reach your destination. Essentially, the ROI in your investment is going to be the amount of money you’re able to make from your initial investment and a number of factors are going to impact that return.
In the context of investments, ROI serves as a universal barometer of profitability. It allows investors to compare the efficiency of different investments and make informed decisions based on data rather than solely on intuition or speculation. This is where professional financial advisors can play a key role in helping investors evaluate different investments, increasing the accuracy of ROI calculations. So whether it’s comparing different stocks or analyzing the profitability of real estate investments, ROI, along with professional advice, is a critical factor in any investment decision-making process.
ROI can be used in various ways to evaluate investment opportunities. It can help in deciding which stocks to buy, whether to invest in real estate or not and even whether a particular business venture is worth pursuing. Appreciating ROI helps investors to make educated decisions on where to deposit their money to work most effectively. Calculating what your potential ROI could be can help you effectively find the right investments for your portfolio.
How to Calculate ROI
Calculating ROI is actually quite straightforward. You start by subtracting the cost of the investment from the current value of the investment. Then, divide the result by the cost of the investment. Finally, multiply the result by 100 to get a percentage. For instance, if you bought a stock for $100 and sold it for $120, your ROI would be 20%.
Consider another scenario related to long-term investment or real estate. If you bought a house 10 years ago for $200,000, which is now worth $260,000, your ROI, not considering other costs, would be 30%. While it might be easy to calculate, it’s not easy to determine what makes a good ROI.
What Is Considered a Good ROI for Investing?
A “good” ROI can vary significantly depending on the type of investment and individual circ*mstances. Financial advisors can help clarify this by considering individuals’ risk tolerance, age, income and other factors. However, here are some general guidelines:
- General ROI: A positive ROI is generally considered good, with a normal ROI of 5-7% often seen as a reasonable expectation. However, a strong general ROI is something greater than 10%.
- Return on Stocks: On average, a ROI of 7% after inflation is often considered good, based on the historical returns of the market.
- Return on Bonds: For bonds, a good ROI is typically around 4-6%.
- Return on Gold: For gold investments, a ROI of more than 5% is seen as favorable.
- Return on Real Estate: A good ROI for real estate investments is typically around 10% or more.
- Return on Alternative Investments (cryptocurrencies, peer-to-peer lending, etc.): The ROI can vary significantly, but a double-digit ROI is often considered good.
Ultimately, what really matters in your ROI is having a return that helps you reach your short- or long-term goals.
Keep in mind that ROI doesn’t account for the time value of money, risk or cash flows, which can all significantly impact an investment’s profitability. This doesn’t give you a full picture of how an investment is working for you.
Bottom Line
ROI is a potent tool for making informed investment decisions. By understanding how to calculate and apply ROI, investors can make decisions that empower them on their financial journey. However, it’s crucial to remember that ROI doesn’t guarantee a cargo full of treasures. It’s a component of the puzzle and should be used along with other measures to evaluate the overall performance and suitability of an investment. It guides you in the wide ocean of investments, but remember, a good sailor always uses more than one navigational tool.
Tips for Investing
- When investing you’ll likely want to maximize your potential returns, which can be difficult to do if you don’t have expertise. That’s where a financial advisor comes in. They can help you make an investing plan and help you find the right asset mix to reach your goals. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- You can also use SmartAsset’s free investment calculator to help you see what your portfolio could return based on your asset mix.
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FAQs
General ROI: A positive ROI is generally considered good, with a normal ROI of 5-7% often seen as a reasonable expectation. However, a strong general ROI is something greater than 10%. Return on Stocks: On average, a ROI of 7% after inflation is often considered good, based on the historical returns of the market.
What is a good ROI for an investment? ›
While the term good is subjective, many professionals consider a good ROI to be 10.5% or greater for investments in stocks. This number is the standard because it's the average return of the S&P 500 , an index that serves as a benchmark of the overall performance of the U.S. stock market.
Is 30% a good ROI? ›
Is 30% Good ROI? An ROI of 30% can be good, but it can depend on how long your ROI has been at 30% in previous years. A 1-year ROI of 20% compared to 3-years of a 30% ROI can be considered a better investment.
What is the average ROI return? ›
The average stock market return is about 10% per year, as measured by the S&P 500 index, but that 10% average rate is reduced by inflation. Investors can expect to lose purchasing power of 2% to 3% every year due to inflation. » Learn more about purchasing power with NerdWallet's inflation calculator.
Why is 7% a good ROI? ›
A good return on investment is generally considered to be around 7% per year, based on the average historic return of the S&P 500 index, adjusted for inflation. The average return of the U.S. stock market is around 10% per year, adjusted for inflation, dating back to the late 1920s.
What is a good ROI over 10 years? ›
The average annual return for the S&P 500, when adjusted for inflation, over the past five, 10 and 20 years is usually somewhere between 7.0% and 10.5%. This means that if your portfolio is returning better than 10.5%, you have a good ROI.
What is the safest investment with the highest return? ›
Here are the best low-risk investments in April 2024:
- High-yield savings accounts.
- Money market funds.
- Short-term certificates of deposit.
- Series I savings bonds.
- Treasury bills, notes, bonds and TIPS.
- Corporate bonds.
- Dividend-paying stocks.
- Preferred stocks.
Reinvest Your Payments
The truth is that most investors won't have the money to generate $1,000 per month in dividends; not at first, anyway. Even if you find a market-beating series of investments that average 3% annual yield, you would still need $400,000 in up-front capital to hit your targets. And that's okay.
What is a good ROI for small business? ›
In general, investors want to see ROI of 5% or higher before investing in a small business. That means if your company earns $250,000 in profits, it should have less than $50,000 in expenses to attract attention.
Can ROI be 200%? ›
Because ROI is most often expressed as a percentage, the quotient is converted to a percentage by multiplying it by 100. This investment's ROI is 2 multiplied by 100, or 200%. Here's another example: An investor puts $10,000 into a venture with no fees or associated costs. The company's net profits are $15,000.
The state with the highest one-year ROI on residential single-family homes is Arizona with 27.42 percent, according to iPropertyManagement data. The next two highest states are Utah with 27.05 percent and Idaho with 27.02 percent.
What investment has the highest return? ›
Key Takeaways
- The U.S. stock market is considered to offer the highest investment returns over time.
- Higher returns, however, come with higher risk.
- Stock prices typically are more volatile than bond prices.
- Stock prices over shorter time periods are more volatile than stock prices over longer time periods.
Many retirement planners suggest the typical 401(k) portfolio generates an average annual return of 5% to 8% based on market conditions. But your 401(k) return depends on different factors like your contributions, investment selection and fees.
Is it smart to invest in gold? ›
Gold is often considered a good investment for diversification, as it may be less correlated with other assets such as stocks or bonds.
How much money do I need to retire? ›
10x your annual salary by 67
To fund an “above average” retirement lifestyle—where you spend 55% of your preretirement income—Fidelity recommends having 12 times your income saved at age 67, which is the normal Social Security retirement age.
What state has the highest ROI? ›
In-Depth Look at the States With the Best Taxpayer ROI
- New Hampshire. New Hampshire is the state with the best taxpayer return on investment, which is due in large part to the fact that it has no state income tax. ...
- Florida. ...
- South Dakota.
A 20% return on investment (ROI) is generally considered excellent, especially in the long term. Positives: Significant growth: A 20% return means your investment has grown by 20% compared to its initial value. This can significantly increase your wealth over time, especially if compounded over many years.
What does a 20% ROI look like? ›
To calculate the return on this investment, divide the net profits ($1,200 - $1,000 = $200) by the investment cost ($1,000), for an ROI of $200/$1,000, or 20%.
Is a 25% ROI good? ›
A 25% yearly return on investment is generally considered to be a very good return, as it is significantly higher than the average annual return of the stock market over the long-term, which is typically around 7-10%.
Is 2% a good ROI? ›
Now, think about a real financial example: a 2 percent return. This may not sound impressive, but let's say you earned that 2 percent in a federally insured, high-yield savings account. In that case, it's a very good return since you didn't have to accept any risk whatsoever.
