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How ROI Is Calculated
ROI = (Net Return / Cost of Investment) × 100. Where Net Return = (Final Value + Income Received) - (Initial Investment + Additional Costs).
Annualized Return (CAGR)
The annualized return (Compound Annual Growth Rate) accounts for the time period: CAGR = (Final Value / Initial Value)^(1 / years) - 1. This allows you to compare investments held for different lengths of time on an equal footing.
Why ROI Alone Isn't Enough
A 50% ROI sounds great — but if it took 20 years, the annualized return is only about 2% per year, which barely keeps pace with inflation. Always consider time when evaluating investments.