Understanding ROI: How to Actually Compare Investments
· 1 min read · Currency & Savings
ROI is one of the most commonly cited — and commonly misused — numbers in personal finance. Here's how to calculate it properly, and its one major blind spot.
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The formula
ROI is calculated as (final value − initial investment) ÷ initial investment × 100. A property bought for 500,000 and now worth 650,000 has a 30% ROI.
What ROI doesn't tell you: time
A 30% ROI over 1 year is a very different result than the same 30% ROI over 10 years — but the raw percentage looks identical. Always check the time period behind an ROI figure before comparing two investments, or you'll be comparing apples to oranges.
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Frequently asked questions
Should I compare ROI across different investment types?
Only carefully — a stock ROI and a property ROI carry very different risk profiles and liquidity, so the same percentage doesn't mean the same thing.
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