ROI (Return on Investment) is the most universal metric in finance — it tells you how much profit an investment generated relative to its cost. But "good" is context-dependent. A 5% ROI on a savings account is excellent; 5% on a high-risk startup is terrible. Understanding what constitutes a good ROI requires benchmarks by investment type, time horizon, and risk level.
Use our Investment Calculator to project returns at different rates.
ROI Formula
Return on Investment (ROI) is the percentage gain or loss relative to cost, calculated as (current value − cost) ÷ cost × 100.
ROI = (Current Value - Cost) ÷ Cost × 100
Example: $10,000 invested → now worth $14,500. ROI = ($14,500 - $10,000) ÷ $10,000 = 45%.
What Is a "Good" ROI by Investment Type
| Investment | Typical Annual ROI | "Good" Threshold | Risk Level |
|---|---|---|---|
| S&P 500 index fund | 8-12% (10% avg since 1926) | Above 8% | Moderate |
| Real estate (rental property) | 8-14% (total: cash flow + appreciation) | Above 10% | Moderate |
| Bonds (aggregate) | 4-6% | Above 4% | Low |
| Savings account / CD | 4-5% (current) | Above 3.5% | None |
| Small business | 15-30%+ | Above 15% | High |
| Private equity (median fund) | 14-18% | Above 12% | High |
| College degree (lifetime ROI) | $1.2M+ premium (Georgetown) | Positive NPV | Low-moderate |
| Home renovation | 50-100% cost recovery at sale | Above 70% | Low |
The benchmark that matters most: inflation-adjusted (real) return. A 10% nominal ROI with 3% inflation = 7% real return. A 4% savings account with 3% inflation = 1% real. For long-term wealth building, you need real returns above 4-5% — which means equities or real estate, not bonds or cash. Cash preserves purchasing power; equities build wealth.
ROI vs Other Return Metrics
ROI = total return as a single percentage (ignores time). Annualized return (CAGR) = average annual return accounting for compounding. IRR = annualized return accounting for timing of all cash flows. For quick comparisons: ROI. For investments with different time horizons: CAGR or IRR. A 45% ROI over 3 years (CAGR: 13.2%) is better than 50% over 5 years (CAGR: 8.4%). See our IRR Calculator.
Frequently Asked Questions
Historical Returns by Asset Class
US Large-Cap Stocks (S&P 500): 10.0% average annual return since 1928. Adjusted for inflation: approximately 7.0%. This is the most commonly cited benchmark for stock market returns. However, individual years range from -37% (2008) to +54% (1933). No single year is average — the average only emerges over decades.
US Small-Cap Stocks: 11.5% average annual return historically. Higher returns compensate for higher volatility and risk. Small-cap stocks have had more severe drawdowns but stronger long-term growth.
International Developed Stocks: 8.0-9.0% average annual return. Lower than US stocks over recent decades but provides diversification benefits during periods when US markets underperform.
Bonds (US Aggregate): 5.0-6.0% average annual return historically. Much lower volatility than stocks but significantly lower returns. During the 2022 rate hiking cycle, bonds lost value alongside stocks — a rare failure of the traditional diversification benefit.
Real Estate (REITs): 8.0-10.0% average annual return including dividends. Provides inflation protection and income but with equity-like volatility. Our ROI Calculator computes returns for any investment scenario.
What Returns Should You Expect Going Forward?
Past returns do not guarantee future results. Several factors suggest lower returns ahead: current stock valuations are above historical averages (the CAPE ratio suggests 6-8% nominal returns), bond yields reflect current interest rates rather than historical averages, and demographic shifts in developed countries may slow economic growth.
Conservative planning assumptions: 6-8% nominal for a diversified stock portfolio, 4-5% for bonds, and 5-7% for a balanced 60/40 portfolio. Using 7% for retirement planning provides a reasonable margin of safety without being so pessimistic that you over-save at the expense of current quality of life. Our Future Value Calculator projects growth at any assumed return rate.
Next Steps
Set return expectations by account type: Retirement accounts (30+ year horizon): target 7-8% annualized real return with a 90/10 stock/bond allocation. Taxable investment accounts: expect 5-7% after taxes. Emergency fund / short-term savings: accept 4-5% in high-yield savings — this money is for safety, not growth. Comparing returns across different risk levels or time horizons is meaningless — always compare within the same category. Use our Inflation-Adjusted Return Calculator to convert nominal returns to real purchasing power.
The bottom line: Context determines what ""good" means. Stocks: 8-12% is good. Bonds: 4-6%. Real estate: 8-14%. Savings: 4-5%. Always compare ROI within the same risk category and use inflation-adjusted (real) returns for long-term planning. A 10% nominal return with 3% inflation is a 7% real return — the number that determines actual wealth accumulation.
Risk-Adjusted Returns: The Metric That Actually Matters
Raw ROI does not tell you whether a return was worth the risk taken. A 15% return from a concentrated bet on one tech stock is not the same as a 12% return from a diversified index fund — the stock could have easily lost 40%. Risk-adjusted return measures how much return you earned per unit of risk, and it is the metric professional investors use to compare strategies.
The Sharpe Ratio is the most common measure: (Portfolio Return - Risk-Free Rate) ÷ Standard Deviation. A Sharpe above 1.0 is good, above 2.0 is excellent. The S&P 500 historically delivers a Sharpe ratio of approximately 0.4-0.5, meaning its excess return is modest relative to its volatility. A 60/40 stock/bond portfolio typically delivers a Sharpe of 0.5-0.6 — slightly better risk-adjusted returns despite lower absolute returns.
For individual investors, this has a practical implication: a diversified portfolio earning 8% with low volatility is superior to a concentrated portfolio earning 12% with high volatility, because the concentrated portfolio has a much higher probability of catastrophic loss. A 40% drawdown requires a 67% gain just to break even — and the emotional damage from large losses causes most investors to sell at the bottom and miss the recovery.
ROI Benchmarks for Non-Market Investments
Not all investments trade on public markets. For common alternative investments, here are realistic ROI benchmarks to evaluate whether your return is competitive:
Rental real estate: target 8-12% total return (cash-on-cash return of 6-10% plus 2-3% annual appreciation). A rental property generating $12,000 net annual income on a $150,000 cash investment delivers an 8% cash-on-cash ROI — competitive with stock market returns but with more work and less liquidity. Cap rates (Net Operating Income ÷ Property Value) of 6-8% are considered healthy in most markets.
Small business investment: target 15-25% ROI to compensate for illiquidity, management time, and business risk. A franchise investment of $200,000 generating $40,000 in annual owner profit (after your salary) delivers a 20% ROI. However, small business investments carry significant failure risk — approximately 20% of small businesses fail in the first year and 50% within five years.
Education ROI: a bachelor's degree delivers approximately 10-15% annual ROI over a career, making it one of the highest-returning investments available. The median lifetime earnings premium for a bachelor's degree over a high school diploma is approximately $1.2 million. A $100,000 degree investment earning $1.2 million in additional lifetime earnings over 40 years equates to a 12% annual ROI — better than the stock market with lower risk.
Home improvement ROI: varies dramatically by project. Kitchen remodels recover 60-80% of cost at sale. Bathroom remodels recover 55-70%. New roofing recovers 60-70%. Converting a garage to living space recovers 80-100% in most markets. A deck addition recovers 65-80%. The projects with the highest ROI are typically curb-appeal improvements (garage door replacement recovers 95-100%) and addressing deferred maintenance rather than luxury upgrades.
The Biggest ROI Mistakes Individual Investors Make
Chasing past performance is the most common and most costly mistake. The fund with the best 3-year return is almost never the fund with the best next-3-year return. Morningstar data consistently shows that top-quintile funds over any 5-year period are more likely to land in the bottom quintile over the following 5 years than to repeat their top performance. Yet investors pour money into last year's winners — buying high — and sell last year's losers — selling low. This behavior gap costs the average investor 1.5-2.0% per year in returns.
Ignoring fees destroys ROI over long time horizons. A fund earning 8% gross with a 1.0% expense ratio delivers 7% net — but over 30 years, that 1% fee consumes 25% of your total wealth. On a $500,000 portfolio, the difference between a 0.03% index fund and a 1.0% actively managed fund is approximately $340,000 over 30 years. This is not a marginal difference — it is the difference between retiring at 62 and retiring at 67.
Measuring ROI over too-short periods leads to poor decisions. Checking your portfolio daily or monthly amplifies the emotional impact of normal volatility. In any given day, stocks are roughly equally likely to be up or down. Over any given year, stocks are up approximately 73% of the time. Over any rolling 20-year period in US history, stocks have been positive 100% of the time. The appropriate ROI evaluation period for a long-term investor is 5-10 years, not months or quarters. Delete the portfolio tracking app from your phone and check your investments quarterly at most.
Comparing your returns to the wrong benchmark creates unnecessary anxiety. A balanced 60/40 portfolio should be compared to a 60/40 benchmark, not the S&P 500. During a year when the S&P 500 returns 25%, a 60/40 portfolio returning 16% is performing exactly as expected — not underperforming. Similarly, a conservative portfolio designed for capital preservation should be compared to inflation plus 2%, not to equity indices.
What Your Result Means
Your portfolio returns 8%+ annually over 5+ years: You are meeting or exceeding the long-term stock market average. Stay the course — consistency matters more than chasing higher returns.
4-7% returns: Likely a balanced or conservative allocation. If you have 15+ years to retirement, increasing stock allocation could capture 2-3% more annually. If near retirement, capital preservation justifies the lower return.
Under 4% returns: Your money is barely keeping pace with inflation. Unless you are within 5 years of needing it, shift toward higher-growth assets (stock index funds) for long-term purchasing power protection.