Question 1

What is ROI?

Accepted Answer

ROI (Return on Investment) measures the profitability of an investment as a percentage. It is calculated as (Net Profit / Cost of Investment) × 100. A positive ROI means you gained money; a negative ROI means you lost money.

Question 2

What is a good ROI?

Accepted Answer

A 'good' ROI depends on the context. For stocks, 7–10% annually is considered good long-term. Real estate might target 8–12%. For business investments, 15–25% is often the benchmark. Always compare to the risk-free rate (e.g., Treasury bonds) and inflation.

Question 3

What's the difference between ROI and annualized ROI?

Accepted Answer

ROI shows total return regardless of time. Annualized ROI (also called CAGR) converts that to a yearly rate, making it easier to compare investments of different durations. An investment that triples in 10 years has a 300% total ROI but only an 11.6% annualized ROI.

Question 4

How do fees affect my real ROI?

Accepted Answer

Investment fees compound over time and significantly reduce your net return. A 1% annual fee on a $100,000 investment earning 7% over 30 years reduces your final balance by about $100,000 compared to a fee-free investment. Always factor in all costs.

Question 5

What is the difference between ROI and IRR?

Accepted Answer

ROI is a simple ratio of profit to cost, ignoring timing. IRR (Internal Rate of Return) accounts for the time value of money and the timing of cash flows. IRR is more useful for multi-year projects with varying cash flows; ROI is simpler for single investments.

Question 6

How does capital gains tax affect my investment returns?

Accepted Answer

Capital gains tax reduces your after-tax return. In the US, long-term capital gains (held 1+ year) are taxed at 0%, 15%, or 20% depending on income. Short-term gains are taxed as ordinary income (up to 37%). Always calculate your after-tax ROI for a true picture.

Question 7

What is a negative ROI and when does it happen?

Accepted Answer

A negative ROI occurs when your investment returns less than you put in. This happens when the asset loses value (stocks drop), business revenues fall short, or costs exceed revenues. A negative ROI of -100% means a total loss of the investment.

Question 8

How do I compare ROI across different investment types?

Accepted Answer

Use annualized ROI to compare investments of different durations. Also consider risk: a 15% ROI from a startup is riskier than 8% from an index fund. Risk-adjusted metrics like the Sharpe ratio give a more complete picture.

Question 9

What is ROI vs. CAGR?

Accepted Answer

CAGR (Compound Annual Growth Rate) is the same as annualized ROI. Both measure the yearly rate of return that would produce the same final value. The formula is: CAGR = (Final Value / Initial Value)^(1/Years) − 1.

Question 10

How do I calculate ROI for real estate?

Accepted Answer

For real estate, ROI = (Annual Rental Income − Annual Expenses) / Total Investment × 100. Total investment includes down payment, closing costs, and renovation. You can also factor in appreciation: add the equity gained to net rental income before dividing.

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