What is a good rate of return?Â
There isn't just one answer to this question. A "good" ROI depends on several factors.The most important consideration in determining a good ROI is your financial need. For example, suppose a young couple is investing to pay for college tuition for their newborn child. A good ROI for them will be one that enables their initial and ongoing investments to grow enough to pay for college expenses 18 years down the road.
It's also important to consider what you're investing in to evaluate what would be a good rate of return. The following table shows compound annual growth rates (CAGR) -- rates of return that assume all profits are reinvested -- for several major popular investment assets from 1926 through 2019:
| 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% |
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.
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.Â
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.
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.Related investing topics
How to calculate return on investment
To determine if an ROI is good, you first need to know how to calculate it. The good news is that it's a really simple calculation:ROI = (Ending value of investment – Initial value of investment) / Initial value of investment
ROI = ($11,000-$10,000) / $10,000 = 10%
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