How to Measure Return on Investment

Total ROI = (final value − total cost) ÷ total cost × 100, where total cost includes the initial investment plus any additional costs. Annualized ROI converts that into a per-year CAGR — (final ÷ cost)^(1/years) − 1 — so investments held for different periods can be compared fairly.

Worked Example

Buying $10,000 of stock and selling for $15,000 three years later is a 50% total ROI but only a 14.5% annualized return. A 60% return over 2 years (26.5% annualized) is actually the better investment despite the lower headline number.

Common Pitfalls

Ignore fees and taxes and you overstate returns; ignore holding period and you cannot compare assets. Always annualize, always include every cost, and remember ROI says nothing about risk — a 20% return on a startup and a 20% return on Treasury bonds are not equivalent achievements.