What Is a Good ROI?
A "good" ROI depends on context, but as a rule of thumb: 7–10% annually is solid for stock market investments, 15%+ is strong for small businesses, and anything above your cost of capital is technically worthwhile. ROI itself is calculated as (Net Profit ÷ Cost of Investment) × 100. So a $1,000 investment that returns $1,150 has an ROI of 15%.
ROI in Plain English
ROI — Return on Investment — answers the simplest question in finance: "For every dollar I put in, how many dollars did I get back?"
The formula:
ROI = (Net Profit ÷ Cost of Investment) × 100
Net profit means what you gained *minus* what you spent. If you invested $5,000 and ended up with $6,200, your net profit is $1,200, and your ROI is (1,200 ÷ 5,000) × 100 = 24%.
Simple enough. The tricky part isn't the math — it's knowing what number to aim for. A 24% ROI sounds great until you learn your neighbor got 40% on a similar investment. Or terrible until you learn the alternative was 3% in a savings account. Context is everything.
Worked Examples Across Different Investments
Example 1: Stock Market
You invest $10,000 in an index fund. A year later it's worth $10,900, and you received $200 in dividends (which you didn't reinvest).
Net profit: (10,900 − 10,000) + 200 = $1,100.
ROI: (1,100 ÷ 10,000) × 100 = 11%.
An 11% ROI in a single year is a good result — slightly above the stock market's long-term average of around 10% nominal (before inflation).
Example 2: Small Business
You spend $3,000 setting up a side business selling handmade furniture (materials, tools, a basic website). In the first year, after all expenses, you clear $4,800 in profit.
Wait — careful. The "cost of investment" here is $3,000. The "net profit" is $4,800 (already net of expenses).
ROI: (4,800 ÷ 3,000) × 100 = 160%.
A 160% ROI looks spectacular, and for a small side hustle it kind of is. But remember: this doesn't account for your *time*. If you spent 500 hours on it, your hourly return is $9.60/hour. Still fine as a hobby-business, but the ROI percentage alone doesn't tell the full story.
Example 3: Real Estate Rental
You buy a rental property for $180,000 (including closing costs). Annual rent collected: $21,600. Annual expenses (taxes, insurance, maintenance, vacancies): $8,400.
Net profit: 21,600 − 8,400 = $13,200.
ROI: (13,200 ÷ 180,000) × 100 = 7.33%.
A 7.3% ROI on rental property is respectable — it's in line with what many landlords target (the "1% rule" aims for roughly 8–12% before expenses). It won't make you rich overnight, but it's steady.
Example 4: A Marketing Campaign
Your business spends $2,500 on online ads. The campaign generates $9,000 in attributable sales, and your profit margin on those sales is 40%.
Net profit from the campaign: $9,000 × 0.40 = $3,600. But you spent $2,500 to get it, so true net profit = 3,600 − 2,500 = $1,100.
ROI: (1,100 ÷ 2,500) × 100 = 44%.
A 44% ROI on ad spend is solid. Most businesses aim for at least 30–50% on paid campaigns; above 100% and you've got a real winner worth scaling up.
Example 5: Education (The Tricky One)
You spend $1,200 on a professional certification course. Over the next year, it helps you land a promotion with a $6,000 annual raise.
ROI: (6,000 ÷ 1,200) × 100 = 500%.
A 500% ROI! But this is a bit misleading — the raise compounds year after year, while the cost was one-time. The *first-year* ROI is 500%, but the lifetime ROI is far higher. Education often has the best ROI of any investment, which is why the calculation gets interesting (and why simple ROI understates it).
So What's Actually "Good"? Benchmarks by Category
Here's where I give you real numbers instead of vague advice:
Stock market (long-term): 7–10% annual ROI is the historical norm for diversified US stocks. If you're consistently beating 10% over a decade, you're doing exceptionally well. Below 5%? You might as well have bought bonds with less stress.
Bonds: 3–5% is typical. Boring, but that's the point — you're trading return for safety.
Savings accounts: 3–5% in the current rate environment (2024–2026). Not really "investment" ROI, but it's your baseline. Any investment should beat this, or why take the risk?
Real estate (rental): 6–12% annual ROI is the target range for most landlords. Below 6% and you're barely beating the stock market with ten times the hassle. Above 12% and you've either found a great deal or you're underestimating expenses.
Small business: 15–30%+ is common for successful small businesses, but the failure rate is high. The *average* small business ROI, accounting for failures, is much lower. Survivorship bias is real.
Marketing/advertising: 30–50% ROI is decent. 100%+ means scale it up. Below 20%? Rework the campaign or kill it.
Your career (education/skills): Often 100%+ in the first year alone, compounding over a lifetime. Almost always the highest ROI available to regular people.
The Benchmark That Matters Most: Your Opportunity Cost
Here's the thing most ROI guides skip: a "good" ROI is relative to what else you could have done with the money.
If your investment returned 8% but you could have gotten 10% in an index fund with zero effort, your 8% wasn't actually good — it was a 2% loss versus the alternative. Economists call this *opportunity cost*, and it's the real benchmark.
The practical version: before celebrating any ROI, ask "What would this money have earned in a simple index fund over the same period?" If your ROI beats that, you earned your return. If not, simpler would have been better.
What ROI Doesn't Tell You
Risk. A 20% ROI from crypto and a 20% ROI from treasury bonds are not the same achievement. ROI is silent on how bumpy the ride was or whether you could have lost everything.
Time. ROI doesn't annualize. A 30% ROI over 3 months is phenomenal (roughly 185% annualized). A 30% ROI over 10 years is terrible (about 2.7% per year). Always ask: "Over what period?"
Cash flow timing. Getting $1,100 profit in month 1 is worth more than getting it in month 12 (time value of money). ROI treats them identically. For precise comparisons, you'd want IRR — but that's a topic for another post.
Non-financial returns. That $1,200 course didn't just bring a raise — it brought skills, confidence, and options. ROI captures none of that. Some of the best investments look mediocre on ROI alone.
A Practical ROI Checklist
Before you invest — or when you're evaluating one — run through this:
- Calculate it honestly. Include ALL costs (fees, taxes, your time if significant). People routinely undercount costs and overstate ROI.
- Annualize it. Divide by the number of years (roughly) to compare against yearly benchmarks. Better yet, use CAGR for multi-year investments.
- Compare to the alternative. Would an index fund have done better with zero work?
- Adjust for risk. A risky 15% isn't better than a safe 10% — it's just differently priced.
- Consider the intangibles. Skills, relationships, optionality, peace of mind. Not everything fits in the formula.
Frequently Asked Questions
What's the difference between ROI and profit margin?
ROI measures return relative to what you *invested*. Profit margin measures profit relative to *revenue*. If you invest $1,000, generate $5,000 in sales, and keep $1,500 as profit: ROI = 150% (1,500 ÷ 1,000), but profit margin = 30% (1,500 ÷ 5,000). Different denominators, different stories.
Is a 100% ROI the same as doubling your money?
Yes. 100% ROI means your net profit equals your original investment — you got your money back plus an equal amount. $1,000 in, $2,000 total out = 100% ROI. (This is different from a 100% *increase*, which would also double it — the terms overlap here, confusingly.)
What's a bad ROI?
Any ROI below what you'd get risk-free (currently ~4–5% in savings) is objectively bad — you took risk for no reward. Negative ROI means you lost money outright. And any ROI below your opportunity cost (what the next-best option would have earned) is bad *relative* to your choices, even if the number looks positive.
How do I calculate ROI if I invested at different times?
Simple ROI breaks down with multiple investments — use IRR (Internal Rate of Return) or XIRR in Excel instead. These account for the timing of each cash flow. If you invested $1,000 in January and another $1,000 in June, a single ROI number will mislead you; IRR won't.
Should I use ROI or CAGR for long-term investments?
Use CAGR for multi-year investments — it annualizes the return and accounts for compounding. ROI is fine for single-period or short-term evaluations. A 5-year investment with 60% total ROI has a CAGR of about 9.9% per year — and that annualized number is what you should compare against benchmarks.
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