Measuring Investment Performance

ROI is the most widely used measure of investment performance because it's simple and universal: the profit earned divided by the money at risk. It works for stocks, real estate, businesses, and marketing campaigns alike. The limitation is that raw ROI ignores time — which is exactly why annualized ROI completes the picture.

ROI vs Annualized ROI

Total ROI tells you the overall gain; annualized ROI tells you the compound growth rate per year. For a $5,000 investment that becomes $7,500 in 3 years, total ROI is 50% but the annualized return is about 14.5% — the figure you compare against the stock market's long-run ~10% average.

Making Better Decisions

Use ROI to screen opportunities, then dig deeper: check risk, liquidity, taxes, and how the return compares to your next-best alternative. A strong ROI on an illiquid, risky asset may be worse than a modest ROI you can actually realize. Consistency and risk-adjusted return beat headline ROI every time.