A 50% return over 2 years is not the same as 50% over 10. Annualized ROI is the only fair way to compare investments.
| Asset class | Annualized | Your return is… |
|---|
ROI is the simplest investment metric: how much profit, divided by how much you put in, expressed as a percentage. Total ROI is fine for same-duration comparisons. For investments held over different time periods, you need annualized ROI (CAGR) — the per-year compounded growth rate. A 45% total ROI over 3 years annualizes to 13.2%; the same 45% over 10 years annualizes to 3.8%. Without annualizing, you can't compare a 3-year private investment to a 10-year stock holding honestly.
| Asset class | Nominal annualized | Real annualized | Source / period |
|---|---|---|---|
| US stocks (S&P 500) | ~10% | ~7% | Shiller / Damodaran, 1928-2024 |
| US bonds (10-yr Treasury) | ~5% | ~2% | Damodaran 1928-2024 |
| Real estate (US residential) | ~6-7% | ~3-4% | Case-Shiller index |
| Gold | ~7% | ~4% | Concentrated in inflation decades |
| T-bills (cash) | ~3-4% | ~0-1% | Federal Reserve historical |
| Private equity (median fund) | ~12-15% | ~9-12% | Cambridge Associates net of fees |
A 50% return on a single biotech is not the same as 50% on a diversified index. Risk-adjusted return (Sharpe ratio, Sortino ratio) corrects for this — but most retail investors quote and compare on raw ROI. The mismatch is why high-volatility strategies look attractive in retrospect; you don't see the dispersion of outcomes that produced the average.
Two investments with identical total ROI can have very different IRRs (Internal Rate of Return) if one front-loaded contributions vs back-loaded. For investments with multiple cash flows (DCA, rental property), IRR is the correct metric. ROI works only for single-buy single-sell positions. Spreadsheet =IRR() takes a list of dated cash flows and returns the time-weighted annualized rate.
A 4% nominal CD return at 3% inflation is roughly 1% real. A 10% nominal stock return at 3% inflation is 7% real. The difference between nominal and real compounds dramatically — over 30 years, $100 at 7% nominal grows to $761 nominal but only $324 in today's dollars (3% inflation). Real returns are the only honest long-horizon metric.
Sources: Robert Shiller online S&P 500 historical data; Aswath Damodaran annual return updates (NYU Stern); Federal Reserve H.15 historical Treasury yields; S&P / Case-Shiller Home Price Indices; Cambridge Associates US Private Equity Index methodology; Sharpe (1966) ratio definition; CFA Institute IRR vs ROI distinction.
ROI = (final value − initial cost) ÷ initial cost. A $10,000 investment that grows to $14,500 has total ROI of 45%. ROI is a "how big was the gain" metric, useful for same-duration comparisons. For different time periods, the better metric is annualized ROI (CAGR — Compound Annual Growth Rate).
Total = cumulative percentage over entire holding period. Annualized = per-year compounded rate. 45% total over 3 years = 13.2% annualized; same 45% over 10 years = 3.8%. Annualized is the only honest way to compare different durations. Marketers love quoting total ROI on long-held positions to inflate the number; sophisticated investors quote annualized.
Long-run nominal benchmarks (Shiller / Damodaran): US stocks ~10% since 1928, ~7% real. US bonds ~5% nom / 2% real. Real estate ~6-7% nom / 3-4% real. Gold ~7% nom but volatile. T-bills ~4% nom / ~0-1% real. Beat the S&P 500 net of fees consistently over 15+ years and you're top quartile of professional managers.
Three things. (1) Risk — 50% on biotech ≠ 50% on index. (2) Timing — ROI ignores when cash flowed in/out, which IRR captures. (3) Scale — 100% on $1k = $1k profit; 10% on $100k = $10k. Bigger percentage isn't always bigger absolute. Use ROI as starting metric, not ending one.
ROI: total cumulative gain percentage. Time-blind. CAGR: annualized ROI for single-cash-flow investment. IRR: rate that makes NPV of all cash flows = 0; captures timing. For buy-and-hold with no interim flows, CAGR = IRR. For multi-flow investments (DCA, rental property), IRR is correct. Levered IRR can differ materially from unlevered ROI.
Real ROI = (1 + nominal) ÷ (1 + inflation) − 1. Approximation: real ≈ nominal − inflation, accurate when both are small. 8% nominal at 3% inflation = 4.85% real. S&P 10% nominal long-run = 7% real after CPI — that real number is what actually grew purchasing power. Always compare real for multi-decade planning.
Rule of 72 estimates time-to-double: years ≈ 72 ÷ annualized rate. At 7% annualized: ~10.3 years. At 12%: ~6 years. Exact: ln(2) ÷ ln(1+r) ≈ 0.693 ÷ r. Rule accurate to ~1% for rates 4-12%. Useful sanity check: "doubled my money in 3 years" = ~25% annualized — possible but exceptional and worth questioning duration and risk.
Leverage materially changes the math. $400k property with $80k down + $320k mortgage that appreciates to $440k: unlevered ROI = 10% on $400k = $40k. Investor's actual ROI = $40k ÷ $80k = 50% — 5× multiplier from 4× leverage. Real estate's high historical IRRs vs S&P are largely leverage-explained; once adjusted for borrowing cost and risk, unlevered RE underperforms equities.
Standard hurdles: 8% IRR is the typical preferred return below which the GP gets no carry. Above, GP earns 20% carry up to gross IRR ~20-25%. Net of fees, median PE fund returns 12-15% IRR over its life — Cambridge Associates and Burgiss data show PE outperforming S&P by 2-3% over rolling 10-year periods, with significant variance. Opaque pricing hides drawdowns.
Compounded brutally. 1% expense ratio on 7% gross over 30 years reduces final balance by ~25%. 2% management fee in a hedge fund halves long-run returns vs same gross strategy in 0.05% index fund. Fees are the single highest-leverage variable an investor controls. Always compute ROI net of all fees (expense ratio, management, performance, transaction costs, advisor).