ROI (Return on Investment)

ROI is the basic percentage gain or loss on money you put to work, before fees and taxes.

Why investors care

It is the first number people quote to judge whether an investment was worth it.

Using it in practice

For multi-year holdings, convert ROI to an annual figure or use CAGR so you can compare it against a bank deposit or index fund. A 40% ROI over eight years is roughly 4.3% a year — fine, but not the heroic number the headline suggests.

Example in numbers

In the real market

A landlord sells a rental property after six years with an ROI of 60%. That looks strong until you annualise it: about 8.1% a year before considering that the property was vacant for four months, needed a $9,000 roof repair, and the buyer paid realtor commissions. A stock index returned 9% a year over the same period with zero landlord work. ROI that ignores time, costs, and effort flatters real estate deals, which is why investors convert every ROI to an annualised figure before comparing opportunities.

Where people go wrong

ROI ignores time. A 20% gain in one month beats the same gain over five years.

Key takeaway

ROI without a time frame is a headline without a date. A 20% return tells you almost nothing until you know whether it took a month or five years, and the same percentage can be heroic or mediocre depending on the period and the risk. Always annualise the figure — or compare against a simple benchmark like a savings account or an index over the same window — before judging any opportunity. Count every cost, including fees, taxes, and the effort you put in, or the number flatters the deal.

Definitions reviewed by the Investing Glossary editorial team.