Decode Smart Investments with a Simple Formula

Even when markets are performing well, not every investment is a smart choice. Some deliver strong returns, while others underperform. That’s where Return on Investment (ROI) comes in — a simple formula that helps you measure profitability and compare opportunities without getting lost in market noise.

Understanding ROI: ROI shows how much profit (or loss) you’ve earned relative to your initial cost. It’s expressed as a percentage, where a higher ROI means a more profitable investment.

Basic ROI Formula:ROI = (Current Value – Cost of Investment) ÷ Cost of Investment × 100

For example, if you invest $2,500 and your investment grows to $3,000, your ROI would be 20%. It’s a quick way to see how well your money is working for you.

Applying ROI to Different Investments When calculating ROI for stocks, you can include dividends to get a more accurate picture of returns:ROI = ((Sale Price – Purchase Price) + Dividends) ÷ Purchase Price × 100

For bonds, you’ll add the interest or coupon payments you’ve earned:ROI = ((Sale Price – Purchase Price) + Interest) ÷ Purchase Price × 100

So if you bought a $950 bond that pays $30 in interest and matures at $1,000, your ROI would be about 8.4%.

What Counts as a “Good” ROI? There’s no single number that defines success. A good ROI depends on your goals, risk tolerance, and investment type. Generally, your returns should beat inflation and reflect the risk you’re taking. For example, the S&P 500 has averaged around 10% annual returns since 1957 — about 7% after inflation — so an ROI above that could be considered strong.

The Limitations of ROI: While ROI is simple and effective, it doesn’t tell the full story. It ignores factors like risk, time horizon, and inflation. Two investments may have the same ROI, but one could be far riskier or take much longer to achieve the same return.

ROI is a quick, powerful tool to evaluate and compare investments, helping you make more informed financial decisions. Just remember — it works best when used alongside other metrics that account for time, risk, and growth potential. When in doubt, consult a financial advisor to help you interpret your results and strengthen your investment strategy.