You have one goal when you invest: to make money. And every investor wants to make as much money as possible. That’s why you’ll want to have at least a general idea of what kind of return you might get before you invest in anything.
Return on investment, or ROI, is a commonly used profitability ratio that measures the amount of return, or profit, an investment generates relative to its costs. ROI is expressed as a percentage and is extremely useful in evaluating individual investments or competing investment opportunities. But what is a good ROI?
Image source: Getty Images.
What is a good rate of return?
There isn’t just one answer to this question. A “good” ROI depends on several factors.
The most important consideration in determining a good ROI is your financial need. For example, suppose a young couple is investing to pay for college tuition for their newborn child. A good ROI for them will be one that enables their initial and ongoing investments to grow enough to pay for college expenses 18 years down the road.
This young family’s definition of a good ROI would be different from that of a retiree who’s seeking to supplement her income. She would consider a good ROI to be a rate of return that generates sufficient recurring income to enable her to live comfortably. Of course, one retiree’s definition of living comfortably could differ from another’s, so their definitions of a good ROI could differ as well.
It’s also important to consider what you’re investing in to evaluate what would be a good rate of return. The following table shows compound annual growth rates (CAGR) — rates of return that assume all profits are reinvested — for several major popular investment assets from 1926 through 2019:
Asset Type
Compound Annual Growth Rate (CAGR)
Small-cap stocks
11.9%
Large-cap stocks
10.2%
Government bonds
5.5%
Treasury bills
3.3%
Data source: Morningstar.
These different historical rates of return underscore a key principle to understand: The higher the risk of a type of investment, the higher the ROI investors will expect. Is an ROI of 8% a good average annual return? The answer is yes if you’re investing in government bonds, which shouldn’t be as risky as investing in stocks. However, many investors probably wouldn’t view an average annual ROI of 8% as a good rate of return for money invested in small-cap stocks over a long period, because such stocks tend to be risky.
Expectations for return from the stock market
Most investors would view an average annual rate of return of 10% or more as a good ROI for long-term investments in the stock market. However, keep in mind that this is an average. Some years will deliver lower returns — perhaps even negative returns. Other years will generate significantly higher returns.
For example, the following chart shows the S&P 500 index returns for each year since 2010. This chart illustrates the kind of year-to-year volatility that investors can experience with the stock market.
Data source: YCharts. Chart by author. 2020 return as of Nov. 27.
In two of the last 11 years, the S&P 500 had a negative return. In 2011 the index delivered a 0% return. In 2016 the S&P generated a positive return of 9.5%, but that was below the “good” ROI of 10% that investors prefer. Even with these subpar years, though, the S&P 500 delivered a compound annual growth rate of 11.4% during the entire period — a very good ROI.
This combination of year-to-year volatility and long-term attractive gains underscores why a buy-and-hold strategy offers investors a better chance of achieving a good ROI. You might lose money in any given year investing in stocks. Selling during those times, though, prevents you from benefiting from big gains later on. If you buy and hold stocks over the long term, your prospects for generating attractive returns will greatly improve.
How to calculate return on investment
To determine if an ROI is good, you first need to know how to calculate it. The good news is that it’s a really simple calculation:
ROI = (Ending value of investment – Initial value of investment) / Initial value of investment
The result is then presented as a ratio or percentage.
Suppose you invest $10,000 in a stock at the beginning of a year. By the end of the year, your stock has gone up enough to drive your overall investment to $11,000. What is your ROI? Let’s plug the numbers into the formula:
ROI = ($11,000-$10,000) / $10,000 = 10%
Based on historical stock market returns, this investment has achieved a good ROI.
TORONTO – Canada’s main stock index was down more than 200 points in late-morning trading, weighed down by losses in the technology, base metal and energy sectors, while U.S. stock markets also fell.
The S&P/TSX composite index was down 239.24 points at 22,749.04.
In New York, the Dow Jones industrial average was down 312.36 points at 40,443.39. The S&P 500 index was down 80.94 points at 5,422.47, while the Nasdaq composite was down 380.17 points at 16,747.49.
The Canadian dollar traded for 73.80 cents US compared with 74.00 cents US on Thursday.
The October crude oil contract was down US$1.07 at US$68.08 per barrel and the October natural gas contract was up less than a penny at US$2.26 per mmBTU.
The December gold contract was down US$2.10 at US$2,541.00 an ounce and the December copper contract was down four cents at US$4.10 a pound.
This report by The Canadian Press was first published Sept. 6, 2024.
TORONTO – Canada’s main stock index was up more than 150 points in late-morning trading, helped by strength in technology, financial and energy stocks, while U.S. stock markets also pushed higher.
The S&P/TSX composite index was up 171.41 points at 23,298.39.
In New York, the Dow Jones industrial average was up 278.37 points at 41,369.79. The S&P 500 index was up 38.17 points at 5,630.35, while the Nasdaq composite was up 177.15 points at 17,733.18.
The Canadian dollar traded for 74.19 cents US compared with 74.23 cents US on Wednesday.
The October crude oil contract was up US$1.75 at US$76.27 per barrel and the October natural gas contract was up less than a penny at US$2.10 per mmBTU.
The December gold contract was up US$18.70 at US$2,556.50 an ounce and the December copper contract was down less than a penny at US$4.22 a pound.
This report by The Canadian Press was first published Aug. 29, 2024.
The crypto market has recently experienced a significant downturn, mirroring broader risk asset sell-offs. Over the past week, Bitcoin’s price dropped by 24%, reaching $53,000, while Ethereum plummeted nearly a third to $2,340. Major altcoins also suffered, with Cardano down 27.7%, Solana 36.2%, Dogecoin 34.6%, XRP 23.1%, Shiba Inu 30.1%, and BNB 25.7%.
The severe downturn in the crypto market appears to be part of a broader flight to safety, triggered by disappointing economic data. A worse-than-expected unemployment report on Friday marked the beginning of a technical recession, as defined by the Sahm Rule. This rule identifies a recession when the three-month average unemployment rate rises by at least half a percentage point from its lowest point in the past year.
Friday’s figures met this threshold, signaling an abrupt economic downshift. Consequently, investors sought safer assets, leading to declines in major stock indices: the S&P 500 dropped 2%, the Nasdaq 2.5%, and the Dow 1.5%. This trend continued into Monday with further sell-offs overseas.
The crypto market’s rapid decline raises questions about its role as either a speculative asset or a hedge against inflation and recession. Despite hopes that crypto could act as a risk hedge, the recent crash suggests it remains a speculative investment.
Since the downturn, the crypto market has seen its largest three-day sell-off in nearly a year, losing over $500 billion in market value. According to CoinGlass data, this bloodbath wiped out more than $1 billion in leveraged positions within the last 24 hours, including $365 million in Bitcoin and $348 million in Ether.
Khushboo Khullar of Lightning Ventures, speaking to Bloomberg, argued that the crypto sell-off is part of a broader liquidity panic as traders rush to cover margin calls. Khullar views this as a temporary sell-off, presenting a potential buying opportunity.
Josh Gilbert, an eToro market analyst, supports Khullar’s perspective, suggesting that the expected Federal Reserve rate cuts could benefit crypto assets. “Crypto assets have sold off, but many investors will see an opportunity. We see Federal Reserve rate cuts, which are now likely to come sharper than expected, as hugely positive for crypto assets,” Gilbert told Coindesk.
Despite the recent volatility, crypto continues to make strides toward mainstream acceptance. Notably, Morgan Stanley will allow its advisors to offer Bitcoin ETFs starting Wednesday. This follows more than half a year after the introduction of the first Bitcoin ETF. The investment bank will enable over 15,000 of its financial advisors to sell BlackRock’s IBIT and Fidelity’s FBTC. This move is seen as a significant step toward the “mainstreamization” of crypto, given the lengthy regulatory and company processes in major investment banks.
The recent crypto market downturn highlights its volatility and the broader economic concerns affecting all risk assets. While some analysts see the current situation as a temporary sell-off and a buying opportunity, others caution against the speculative nature of crypto. As the market evolves, its role as a mainstream alternative asset continues to grow, marked by increasing institutional acceptance and new investment opportunities.
