ROI and CAGR: Measuring Investment Performance
ROI (Return on Investment) and CAGR (Compound Annual Growth Rate) are the two most important metrics for evaluating investment performance. ROI tells you "how much did I make, total?" CAGR tells you "what was my average yearly return?" Both are essential — and understanding the difference prevents costly mistakes.
| Investment | Initial | Final | Years | ROI | CAGR |
|---|---|---|---|---|---|
| S&P 500 Index Fund | $10,000 | $19,670 | 10 | 96.7% | 7.0% |
| Apple Stock (2015→2025) | $10,000 | $62,500 | 10 | 525% | 20.1% |
| Savings Account (0.5%) | $10,000 | $10,511 | 10 | 5.1% | 0.5% |
Real-World Example: Meet Raj
Raj invested $25,000 in a diversified ETF portfolio in 2018. By 2025 (7 years), the portfolio is worth $48,000. His ROI is 92% — he nearly doubled his money. But his CAGR is approximately 9.8% per year — a much more useful number for comparing against other investment options or the broader market.
Common Mistakes to Avoid
- Comparing ROI across different timeframes. A 100% ROI over 5 years (CAGR ~15%) is much better than 100% over 20 years (CAGR ~3.6%). Always compare CAGR, not raw ROI.
- Ignoring dividends in total return. The S&P 500 price return over 10 years might be 80%, but total return including reinvested dividends could be 120%+. Always use total return for ROI.
- Focusing only on past returns. Past performance does not guarantee future results. Use historical data as context, not prediction.