What is a good return on investment? Tips to consider
Editorial staff, J.P. Morgan Wealth Management
- Return on investment (ROI) is a decision-making tool that can help you compare investment opportunities, evaluate profitability and align your financial goals with an investment strategy.
- What may be considered a “good” ROI varies depending on the type of investment, along with overall risk tolerance.
- ROI isn’t the only metric to use to evaluate investment options. You may want to use it alongside other metrics – like Net Present Value (NPV) and Rate of Return (RoR) – for a more robust evaluation.
When you take the plunge and finally decide to invest some of your hard-earned money, the first question on your mind may be, “What is a good return on investment?”
Whether you’re buying shares of stock, exploring real estate or debating bonds, understanding the benchmarks for a good return on investment (ROI) may help you strategize and set realistic goals.
It’s important to remember that as you do this determining what may be considered “good” can fluctuate widely depending on the sector you’re investing in, the investment type, the level of risk of the investment and more. If you want to assess your ROI, understanding these variables may be helpful.
What is return on investment (ROI)?
ROI measures the profitability of an investment expressed as a percentage. It calculates how much you gain (or lose) compared to your initial investment.
This percentage provides a snapshot of how well your money is performing. Bear in mind that ROI alone doesn’t tell the whole story. Other factors, like risk tolerance, time horizon and industry trends, play critical roles in determining what a “good” ROI looks like for you.
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How to calculate ROI
The formula for calculating ROI is simple:
ROI = [(Gain from Investment − Cost of Investment) ÷ Cost of Investment] × 100
Subtract your investment cost from your net gain. Then, divide the result by the investment cost and multiply by 100.
For example, if you invest $1,000 in stocks and your portfolio grows to $1,100, the ROI would be:
ROI = [($1,100−$1,000) ÷ $1,000] × 100 = 10%
How is ROI used to make investment decisions?
ROI can serve as a decision-making tool for investors, businesses and policymakers alike.
For businesses, ROI might be used to determine the profitability of a marketing campaign or an operations project per dollar spent. Real estate investors may use it to determine whether rental income covers acquisition costs and expenses. Policymakers may use it to measure whether a specific program achieved its desired results in terms of community investment, tax revenue raised or promotion of a specific social goal.
For individual investors, ROI may be used to compare potential opportunities, such as choosing between a high-interest savings account or investing in real estate, or to compare the outcome of various investments.
Of course, how ROI is used may vary from investor to investor. While one investor may focus solely on the potential ROI from a financial perspective, another investor may use ROI to balance profitability with their other goals.
What is a good return on investment percentage?
So, what may be considered a good ROI?
While a positive ROI (anything above zero) will indicate that you’re making money, what may be considered “good” largely depends on what, why and where you’re investing.
Here are some factors you may want to consider:
Historical benchmarks
Potential ROI can vary greatly depending on the type of investment. One investment may have a greater potential ROI but come with greater risk, while another may have a lower ROI but provide greater long-term stability.
That said, knowing the expected range of ROI for different types of investments can help you gauge whether an investment’s current ROI is in alignment with the historical norms for a particular investment.
When considering an asset’s potential ROI, it’s important to consider both its historical average ROI and its potential for volatility.
Looking at historical data from 1928 to 2024, some common benchmarks emerge. Let’s look at a few for context.
- Stocks: The S&P 500 – the index of U.S. large-cap stocks – has averaged an annual ROI of roughly 12% during this time period, while the S&P small-cap index has averaged an annual ROI of roughly 17%. However, the small-cap index also has a greater history of volatility.
- Treasury bills: The average ROI for a 3-month Treasury bond is roughly 3% for this time period, and the ROI for a 10-year Treasury bond has been roughly 5%. Both have little to no volatility, making them a steady investment, but with a more limited ROI than other investments.
- Real estate: Real estate investments have offered an ROI of roughly 4.5% during this time period with relatively low volatility. This has made real estate a relatively safe investment with a dependable ROI.
- Gold: Historically, gold has offered an average ROI of 6.75% with lower volatility than stocks, but higher volatility than bonds and real estate. This has made gold attractive during times of uncertainty.
Keep in mind that ROI can be affected by factors including inflation. This means that an investment like bonds may be a safe way to keep pace with inflation but may not offer much ROI beyond that.
Another thing to keep in mind is that alternative investments may offer the potential for a high ROI, but may carry very high risks.
All of which is to say, assessing historical ROI is a good point of analysis, but there are many more factors to consider. Additionally, past performance is not indicative of future results, so it’s important to weigh your risk tolerance when choosing where to invest and consider how it aligns with your long-term goals.
Risk tolerance
What may feel like a “good” ROI will depend on how much risk you’re willing to take.
Higher-risk investments, such as cryptocurrencies, may yield bigger rewards but also come with a high risk of loss. Lower-risk assets, like government bonds, tend to deliver smaller, steadier returns.
Length of investment
ROI doesn’t exist in isolation – it’s tied to time. Short-term investments may not yield the same ROI as long-term commitments. Investments in stocks, for instance, can provide negative ROI during market downturns but may rebound significantly over an extended period.
Personal investing goals
If you need cash flow for everyday expenses, you might prefer lower-risk investments that provide steady ROI that focus on income generation. For longer-term goals, like retirement, higher-risk investments yielding stronger ROI over time may be the better choice. All of which is to say that deciding what a potentially “good” ROI is will depend a lot on your personal investing goals.
Why does a good ROI matter?
ROI does more than validate your financial choices, it provides clarity on the viability of your investments, helps set future expectations and builds financial confidence.
ROI is about what you’re getting out of your investment. It’s also about the strategy and foresight behind your investments, so you can make even savvier decisions in the future.
Understanding ROI enables you to identify potentially high-performing investments and avoid underperforming ones. It also allows for apples-to-apples comparisons across diverse opportunities, potentially enabling more efficient and effective decision-making.
Tips for investing with ROI in mind
ROI can guide your financial decisions, but only if you apply it wisely. Here are some tips to keep your investments on track.
Consider long-term vs. short-term investments
While short-term investments may sound appealing, they may not offer the same potential for an ROI as longer-term investments. Long-term investments tend to generate steadier and often higher returns, especially in markets like the stock market and real estate.
Avoid panicking
Market downturns can cause negative returns in the short term, but these fluctuations are often temporary.
For example, remember stocks have historically generated positive returns over longer time frames.
Understand how inflation impacts ROI
Inflation can erode purchasing power, meaning that a 5% ROI might actually lead to negative “real” returns if inflation exceeds 5%. Be sure to factor this into your benchmarks.
Don’t forget about the limitations of ROI
ROI offers a helpful snapshot of profitability, but it doesn’t consider variables like risk, cash flow or the time value of money. You may want to use ROI alongside other metrics like Net Present Value (NPV) or Internal Rate of Return (IRR) for more robust and accurate evaluations of investments.
Use it in conjunction with rate of return (RoR)
While similar to ROI, RoR focuses on annualized growth rates, giving you a clear picture of your yearly progress. Investors find RoR helpful for tracking performance over an extended time period.
The bottom line
ROI is an accessible and versatile financial metric, but its true value comes from how you interpret and apply it.
By understanding the factors that influence ROI and aligning it with your goals, you may be able to make smarter investing decisions that support your sustained financial growth.
If you’re not sure which investing options are best for your personal situation, speak with a J.P. Morgan Advisor to create your personalized strategy today.
Frequently asked questions about rate of return
A 10% ROI may be realistic depending on the investment type. As noted above, the S&P 500 had an average annual ROI of 12% from 1928 to 2024. Keep in mind this is only an historical average. Double-digit profits and losses are possible from year-to-year, and past success is not indicative of future results.
First, it’s important to understand that stock market returns are never guaranteed and there is always an element of risk in investing. As a hypothetical and for illustrative purposes only, to generate $3,000 monthly with your investments, you’d need roughly $900,000 and to generate a consistent 4% ROI annually. Keep in mind true returns will vary depending on your investments – this example is just to provide a sense of the amount required to generate that kind of return.
It depends on the context. A 5% ROI might be solid for some kinds of investments but underwhelming for others. To assess if a ROI is strong, compare it with available benchmarks and your goals.
Achieving a 20% ROI is considered excellent in most sectors. However, returns at this level often involve higher risk, such as making alternative or speculative investments. While these investments may provide high ROI, they can also generate significant losses.
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Editorial staff, J.P. Morgan Wealth Management
