ROI Calculator
A 50% total return sounds impressive until you learn it took twelve years. Annualising is what makes returns comparable.
Total ROI and annualised return
Total ROI answers “how much did I make?”. The compound annual growth rate answers “at what rate did it grow?”, and only the second is comparable across investments held for different lengths of time.
£10,000 growing to £14,500 is a 45 % total return. Over three years that is 13.2 % a year, which is very good. Over twelve years it is 3.2 % a year, which after inflation is roughly nothing. The total return is identical in both cases.
What belongs in the calculation
ROI is easy to flatter by leaving things out. A defensible figure includes:
- All acquisition costs: commissions, stamp duty, legal and survey fees, platform charges. These belong in the cost, not ignored.
- All income: dividends, interest, rent received. Excluding these understates the return of income-producing assets badly.
- Ongoing costs: management fees, maintenance, insurance, void periods. Net them off the income.
- Selling costs and tax if you want the return you actually keep.
A property showing a “50 % return” before purchase costs, maintenance, agent fees and capital gains tax may be well under half that after them.
What ROI cannot tell you
ROI is a single number describing an outcome, and it hides several things that matter:
- Risk. A 12 % return from government bonds and a 12 % return from a single speculative stock are not the same achievement. ROI says nothing about the range of outcomes that were possible.
- Timing of cash flows. If you added money at different points, simple ROI is misleading. Money-weighted return (IRR) handles this properly.
- Opportunity cost. A 6 % return in a year when a broad index returned 20 % is underperformance, not success.
- Inflation. A 4 % nominal return with 5 % inflation is a real loss.
Frequently asked questions
What is a good ROI?
It only has meaning relative to risk and to alternatives. Historically, broad equity markets have returned around 7–10 % annually before inflation over long periods; government bonds considerably less. A return below what a risk-free deposit pays is poor regardless of how large the total looks.
Why does annualising matter so much?
Because total return scales with time and tells you nothing about efficiency. Comparing a three-year investment with a twelve-year one on total return alone will systematically favour the longer hold even when it performed far worse per year.
Should I use ROI or IRR?
ROI for a single purchase and a single sale. IRR when money went in or came out at multiple points, such as a rental property with ongoing cash flows or a portfolio you contribute to monthly — IRR accounts for when each pound was actually at work.