Measure return on investment as a total percentage and an annualized rate.
ROI (Return on Investment) measures the gain or loss on an investment relative to its cost. Total ROI is straightforward: (final value − cost) / cost. But total ROI alone doesn't tell you how fast you earned it — a 50% return in two years is vastly better than the same return over 20 years. The annualized ROI (also called CAGR — Compound Annual Growth Rate) answers that question by finding the constant annual return that produces the observed total over the holding period. Use CAGR to compare investments with different time horizons on equal footing.
Total ROI
ROI = (Final value − Initial cost − Additional costs) / Initial cost × 100
Annualized ROI (CAGR)
CAGR = (Final value / Initial value)^(1/n) − 1
Total ROI is the raw percentage gain or loss, regardless of time. Annualized ROI (CAGR) converts that to a per-year compound rate. A $10,000 investment worth $15,000 after 3 years has a 50% total ROI but only a 14.5% annualized ROI — because it took three years to accumulate.
No. This is nominal ROI. To get real ROI, subtract the inflation rate from the annualized ROI: if CAGR is 14.5% and inflation is 3%, the real return is roughly 11.2% (exact: (1.145/1.03) − 1 = 11.2%).
Any cash outflows beyond the initial investment that reduce your net return: brokerage commissions, transaction taxes, management fees, maintenance costs, or closing costs. Include them to calculate your true net return.
Yes. A negative ROI means the investment lost money. If you invested $10,000 and recovered only $7,000, your ROI is −30%. The annualized figure will also be negative.