ROI: Return on Investment Formula & Annualized Returns

Asset

Long-run annualized

Demand deposit

0.2%

Money market fund

1.5%–2%

Bond fund

2%–4%

CSI 300 (long horizon)

7%–9%

US S&P 500 (long horizon)

7%–10%

Key Takeaways

Basic ROI: (final − invested) ÷ invested × 100% — includes all costs (fees, taxes, repairs)

Annualized: (1 + total ROI)^(1/n) − 1; 50% over 4 years = 10.67%/year

The time trap: 30% in 1 year beats 50% in 4 years (30% vs 10.7% annualized)

Hidden costs: transaction fees, holding costs and taxes routinely cut headline ROI by 3-10pp

Core answer: ROI = (gain − cost) ÷ cost × 100%. Invest ¥100,000, get back ¥115,000: ROI = 15%. For multi-year holdings, annualize: (1.15)^(1/n) − 1. ROI's blindness: it ignores time and cash-flow timing — a 30% ROI in 1 year beats 40% in 5 years (30% vs 7% annualized). Business variant: marketing ROI = incremental gross profit ÷ spend, not revenue ÷ spend.

The basic math

Invested	Returned	ROI
¥100,000	¥115,000	15%
¥100,000	¥130,000	30%
¥50,000	¥40,000	−20%

Annualize with (1+ROI)^(1/n)−1: 30% in 1.5 years = 19.1%/yr; 30% in 3 years = 9.1%/yr.

ROI's three blind spots

Time — fixed by annualizing (see roi-annual guide).
Risk — 15% from a deposit and 15% from a crypto trade are not the same ROI quality.
Cash-flow shape — money in and out mid-period needs IRR/XIRR, not simple ROI.

Worked examples

Example 1 — Renovation ROI. ¥200k kitchen remodel adds ¥150k to sale price: ROI = −25% — most renovations return 50–80% of cost; buy for your own use, not resale profit.

Example 2 — Marketing ROI. ¥100k ad spend drives ¥500k revenue at 30% margin = ¥150k gross profit: ROI = (150−100)/100 = 50%. Using revenue (500%) instead of profit inflates the campaign's story 10×.

Example 3 — Education ROI. MBA cost ¥400k (tuition + 2-year lost salary ¥600k = ¥1M total); salary uplift ¥150k/yr: simple payback 6.7 years, but the uplift compounds over a 30-year career — NPV positive at any reasonable discount rate, provided the uplift is real.

Example 4 — Rental property. ¥2M property, net rent after costs ¥60k/yr: cash ROI = 3%/yr before appreciation; add 2%/yr price growth for a 5% total — then compare honestly against a 4% bond fund with zero toilets to fix.

Common mistakes and myths

Forgetting hidden costs — transaction fees, taxes, your time; the denominator must include everything consumed.
Revenue-as-return — marketing and sales contexts constantly quote revenue ROI; profit-basis is the only honest one.
Ignoring opportunity cost — beating 0% isn't the bar; beating your next-best alternative is.
Survivor storytelling — "this trade made 200%" without the portfolio context; ROI of one position ≠ strategy ROI.
Not stress-testing — an ROI built on best-case assumptions is fiction; run base/pessimistic cases before committing.

Frequently Asked Questions

How do I calculate ROI?

ROI = (final value − total invested) ÷ total invested × 100%. Bought shares for $10k, sold for $13k: ROI = 3,000 ÷ 10,000 = 30%. Include every cost — commissions, transfer fees, renovation on property — or you overstate the return.

How do I annualize ROI for fair comparison?

Annualized = (1 + total ROI)^(1/years) − 1. A 50% gain over 4 years: 1.5^(1/4) − 1 = 10.67%/year. A 30% gain in 1 year is 30%/year — far better despite the smaller total. Never compare raw ROIs across different holding periods.

What is a good ROI?

Benchmark against alternatives: risk-free deposits ~2%, broad stock indices ~7-10% long-run, real estate 5-8% plus rent. A business project below your cost of capital (typically 8-12%) destroys value. Any "guaranteed" return above ~6% in today's environment deserves deep skepticism.

Why can ROI be misleading?

It ignores time (30% in 1 year vs 10 years), ignores risk (lottery vs bonds), and ignores cash-flow timing (money back early is worth more). For multi-period cash flows use IRR; for risk-adjusted comparison use Sharpe ratio. ROI is a first screen, not a verdict.

How do I compute ROI on a rental property?

Annual net income (rent − vacancy − management − maintenance − tax − insurance) ÷ total cash invested (down payment + closing + renovation). $50k invested, $3.5k net/year → 7% cash-on-cash ROI. Add principal paydown and appreciation separately — and subtract them honestly when they are zero.

How do taxes affect ROI?

Compute after-tax ROI: pre-tax gain × (1 − tax rate). A 20% gain taxed at 20% is really 16%. Tax-advantaged accounts (pension, ISA equivalents) can add 2-4pp to effective annual returns over decades. Two investments with identical pre-tax ROI can differ hugely after tax.

Typical annualized returns by asset