What's a Good Return on Investment (ROI)?

Return on investment (ROI) can be a key compass for investors navigating the sea of financial decisions. To use it effectively though, it’s crucial to understand what constitutes a good ROI and how to evaluate the metric depending on whether you are investing in stocks, bonds or real estate. A strong ROI is going to vary by investment and by 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)?

Return on investment, or ROI, is a performance measure that investors use to evaluate the efficiency or profitability of an investment. The higher the ROI, the better the investment is perceived to be performing. Essentially, the ROI in your investment reflects the amount of money you’re able to make from your initial investment.

ROI allows investors to compare the efficiency of different investments and make decisions based on data rather than solely on intuition or speculation. Investors can use ROI in various ways to evaluate investment opportunities. It can help when deciding which stocks to buy, whether or not to invest in real estate and even whether a particular business venture is worth pursuing. Appreciating ROI helps investors make educated decisions on where to deposit their money to work most effectively.

How to Calculate ROI

Calculating ROI is 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, and that house is now worth $260,000, your ROI, not considering other costs, would be 30%.

What Is Considered a Good ROI for Investing?

A “good” ROI can vary significantly depending on the type of investment and individual circumstances. 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 an ROI of 5-7% often seen as a reasonable expectation. A strong general ROI is typically one greater than 10%.
Return on stocks: On average, an 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, an 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 (i.e., cryptocurrencies, peer-to-peer lending, etc.): The ROI can vary significantly, but a double-digit ROI is often considered good.

Ultimately, what matters in your ROI is having a return that helps you reach your short- or long-term goals.

Also, keep in mind that ROI doesn’t account for the time value of money, risk or cash flows, all of which can significantly impact an investment’s profitability. In other words, ROI doesn’t give you a full picture of how an investment is working for you.

How to Improve Your ROI

Improving your return on investment requires strategic planning and thoughtful execution. Maximizing your return on investment requires strategic planning and disciplined execution. Whether you’re a seasoned investor or just starting out, these proven strategies can help boost your investment performance over time:

Diversify your portfolio across multiple asset classes. Spreading your investments across stocks, bonds, real estate and other asset classes helps manage risk while capturing growth opportunities. Diversification prevents a single market downturn from devastating your entire portfolio, allowing you to weather market volatility with greater confidence.
Minimize investment fees and expenses. High fees can significantly erode your investment returns over time. Look for low-cost index funds, ETFs with minimal expense ratios and brokerages that offer commission-free trading. Even a difference of 0.5% in annual fees can translate to thousands of dollars in savings over decades of investing.
Implement dollar-cost averaging. Rather than trying to time the market, invest consistent amounts at regular intervals regardless of market conditions. This disciplined approach helps you buy more shares when prices are low and fewer when prices are high, potentially lowering your average cost per share over time.
Regularly rebalance your portfolio. As market movements shift your asset allocation away from your target, periodically adjust your holdings to maintain your desired risk level. Rebalancing forces you to buy low and sell high, which is the fundamental principle for how to improve your investment ROI.
Consider tax-efficient investing strategies. Utilize tax-advantaged accounts like 401(k)s, IRAs and HSAs to minimize tax drag on your returns. Additionally, be strategic about which investments you hold in taxable versus tax-advantaged accounts to optimize your after-tax returns.

Where ROI Falls Short: What It Does Not Tell You

ROI is a useful starting point. But relying on it as your primary measure of investment performance can lead to decisions that look sound on paper but miss important context.

The most significant limitation is that ROI does not account for time. A 30% return sounds strong, but it means something very different if an investor earned it in two years versus 10. Without factoring in how long the money was tied up, you cannot make a meaningful comparison between investments. Annualized return, which converts the total gain into a yearly rate, gives a much clearer picture of how efficiently an investment grew over time.

ROI also says nothing about risk. Two investments can produce identical returns while carrying completely different levels of volatility, uncertainty or potential for loss. An investment that returned 12% with significant price swings and the real possibility of a loss is not the same as one that returned 12% with consistent, predictable performance. Risk-adjusted measures like the Sharpe ratio attempt to account for this by comparing return against the volatility required to achieve it.

Costs are another blind spot of ROI. A raw ROI calculation typically captures the difference between purchase price and sale price. However, it may not fully account for transaction fees, maintenance expenses, property taxes, inflation or the taxes owed on the gain. A real estate investment that shows a 40% ROI over a decade may look considerably less impressive after factoring in carrying costs, capital gains taxes and inflation.

Opportunity cost is also worth considering. The relevant question is not just whether an investment made money, but whether it made more than a reasonable alternative would have over the same period with a comparable level of risk. A return that trails a simple index fund over the same timeframe may not justify the effort, cost or risk involved in achieving it.

Bottom Line

By understanding how to calculate and apply ROI, investors can make more informed investment decisions. However, it’s crucial to remember that ROI is not a guarantee. Rather, it’s just one of the puzzle, and investors should use it along with other measures to evaluate an investment’s overall performance and suitability.

Tips for Investing

When investing, you’ll likely want to maximize your potential returns. This can be difficult to do if you don’t have expertise, which is where a financial advisor comes in. They can help you make an investment plan and 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 vetted financial advisors who serve your area. From there, you can have a free introductory call with your matches to decide who is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Another way to determine the right mix for your portfolio is to use SmartAsset’s free investment calculator. This can help you see what your portfolio could return based on your asset mix.