Finance
ROI calculator
A 60% return means nothing until you know whether it took eight months or eight years. The annualised figure is the one that compares.
Two different questions
CAGR = (final ÷ initial)1/years − 1
ROI answers "how much did I make in total". CAGR answers "at what steady annual rate would that have happened". The second is the one that lets you compare a property held for nine years against a stock held for fourteen months.
A 60% total return over four years is 12.5% annualised. The same 60% over eight months is 100% annualised. Quoting only the first figure is a standard technique in marketing material for exactly this reason.
Include everything you put in
The most common way to overstate a return is to omit costs. A complete cost basis includes purchase price, commissions and fees, and — for property — stamp duty or transfer tax, legal fees, and every capital improvement made while you owned it. On the other side, subtract selling costs from the final value.
Ongoing income belongs in the calculation too. Dividends, interest and rent are part of the return, and for income-heavy assets they can dominate it. The income field above adds them, though it treats them as if received at the end — which slightly understates the true return, since real income could have been reinvested.
What ROI cannot tell you
- Risk. Two investments returning 9% annualised are not equivalent if one moved smoothly and the other halved twice on the way. Return without volatility is half the picture.
- Inflation. A 4% nominal return during 5% inflation is a real loss. Subtract inflation before deciding whether you gained purchasing power.
- Tax. Returns in a taxable account are reduced by capital gains tax and, for income, by tax at your marginal rate. The same nominal return is worth more inside a sheltered account.
- Opportunity cost. Beating zero is not the benchmark. The relevant comparison is what a simple index fund would have returned over the same period.
When CAGR is the wrong tool
CAGR assumes a single sum invested at the start and left alone. If you added or withdrew money along the way, it will give a misleading figure, because the timing of those flows changes the result substantially. The correct measure there is the internal rate of return, which weights each cash flow by when it happened.
As a rough test: if you made regular contributions, treat the CAGR here as indicative rather than exact.
Common questions
What counts as a good ROI?
It depends entirely on the risk and the alternative. A broad stock index has returned roughly 10% nominal annually over long periods, so that is the usual benchmark for equity risk. Anything promising much more than that with less risk deserves scepticism rather than enthusiasm.
Why is my annualised return lower than I expected?
Because compounding runs both ways. A 100% gain followed by a 50% loss leaves you exactly where you started — 0% annualised, despite an average of +25% if you naively averaged the two years. Averaging annual returns overstates performance whenever those returns vary.
How do I calculate ROI on a rental property?
Cash-on-cash return divides annual net cash flow by the cash you actually invested, which for a mortgaged property is the deposit and costs rather than the purchase price. Total return then adds the change in equity. Both are worth calculating, because a property can have poor cash flow and strong total return, or the reverse.