What is ROI and why does it matter?
Return on Investment (ROI) measures how much profit you make relative to what you invested. It's expressed as a percentage and helps you compare different investment opportunities. A higher ROI means you're getting more bang for your buck. Smart investors use ROI to decide where to put their money and to track how well their investments are performing.
What's considered a good ROI?
A 'good' ROI depends on the type of investment and your risk tolerance. For stocks, the S&P 500 averages around 10% annually over long periods. Real estate investors often target 8-12%. The key is comparing ROI to similar investments and considering the risk involved. Higher returns usually come with higher risk.
What's the difference between simple ROI and annualized ROI?
Simple ROI shows your total return as a percentage of your initial investment, but it doesn't account for time. Annualized ROI (also called CAGR) tells you your average yearly return, which is much more useful for comparing investments held for different periods. A 50% return over 10 years sounds great, but it's only about 4% annually.
How do I calculate ROI for investments with ongoing cash flow?
For investments like rental properties or dividend stocks, you need to factor in both the cash flow you receive and any change in the investment's value. The payback period calculator shows how long until you've recovered your initial investment through cash flow alone, while NPV helps you determine if the investment is worth it compared to other opportunities.