Breakdown
How it works
A 35% ROI over 2 years and a 35% ROI over 7 years are very different outcomes. Annualising (the geometric average per year) puts them on the same footing: 16.2% a year versus 4.4% a year.
Formula
ROI = (final value − cost − fees) ÷ cost
Annualised = (1 + ROI)^(1 ÷ years) − 1
Worked example
Invested 10,000, sold for 13,500 after 2 years: ROI 35%, annualised 16.2%.
Frequently asked questions
What is a good ROI?
Depends on risk: global equities average 7–10% a year, property 6–9% including rent, savings 3–5%. Judge against the risk-free rate plus what the risk deserves.
Should I include dividends or rent?
Yes — add income received to the final value. Otherwise ROI understates the true return.
ROI vs IRR?
ROI ignores timing of cash flows. IRR accounts for when money went in and out — use the NPV/IRR calculator for investments with multiple contributions.