What Is a Good ROI? | The Motley Fool

No investment is worth the risk unless you get a return. But what is a good return on investment?

By Keith Speights – Updated Sep 10, 2024 at 9:51 AM

Key Points

A "good" ROI varies depending on individual financial goals and the type of investment.
Historically, small-cap stocks had a higher ROI (11.9% CAGR) than large-cap stocks (10.2% CAGR).
Using a buy-and-hold strategy in volatile markets can lead to more favorable long-term returns.

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?

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Return on Investment (ROI)

ROI stands for Return on Investment and is a metric used to measure the efficiency of the performance of an investment over time.

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Data source: Morningstar.
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%

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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 a rate of return 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.

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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 2010-2020. This chart illustrates the kind of year-to-year volatility investors can experience with the stock market.

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S&P 500 performance chart for 2010 - 2020 — Data source: YCharts. Chart by author.

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In two of the past 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 CAGR of 11.4% during the entire period -- a very good ROI.

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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.

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ROI = (Ending value of investment – Initial value of investment) / Initial value of investment

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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:

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ROI = ($11,000-$10,000) / $10,000 = 10%

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Based on historical stock market returns, this investment has achieved a good ROI.

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About the Author

Keith Speights is a contributing Motley Fool healthcare analyst covering publicly traded companies across pharmaceuticals, biotechnology, medical devices, technology, and marijuana. Prior to The Motley Fool, Keith was CEO of Constant Care Technology, a healthcare technology company; vice president of American HealthTech, a healthcare software company; and a director of operations for Blue Cross Blue Shield of Mississippi, a health insurer. He holds a B.S. in Industrial Engineering from Mississippi State University.

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