Target ROI for Your Investments?
What’s a Strong Target ROI for Your Investments?
Investing is a trade-off between risk and return. Return on Investment (ROI) is a common investment term that measures the profit an investment generates relative to the investment’s cost. ROI is typically expressed as a percentage to help evaluate and compare investment opportunities. Anecdotally, many investors will consider 7% a good ROI for stock investments. However, an investor’s target ROI may differ based on their willingness to take risks, the length of investment, and other considerations.
Calculating ROI
ROI is calculated as the net profit during a certain time divided by the cost of investment, which is then multiplied by 100 to express the ratio as a percentage. If necessary, factor in capital gain taxes and fees, for a more refined number. Also, many online calculators can generate this number, including calculator.net.
Calculating an ROI is a helpful tool for comparing investment opportunities however there are a few things to consider:
· Accurate numbers are critical for generating an accurate ROI; so make sure your inputs are correct.
· ROI does not consider risk, so investors need to ensure they are considering the risk of their investment alongside the ROI.
· The concept that a sum of money is worth more now than the same sum will be at a future date due to its earnings potential in the interim is also not a factor when calculating ROI. A complementary metric, that takes factors in the time value of money is the Internal Rate of Return (IRR).
What is a Good Target Return on Investment?
The expectation for return on investment varies due to several considerations, including investment type, risk, time, and the state of the economy. Looking at the S&P 500 shows that the average ROI for the stock market over the past 30 years has been around 7.5%. Many investors will consider anything over 7% to be a good ROI for stock investments. For real estate investments, a good ROI may vary based on the location of the investment, the risk of the investment, and the financing method. Many real estate experts suggest 8% as a good ROI for investment properties. Some ROIs can be significantly lower, for example, the average annual return for gold is 0.8% and for bonds is 1.6%.
To determine if your target ROI is good, consider the following questions:
How much risk am I willing to take?
How long do I plan to invest?
What are your goals for this investment?
What happens if I lose the investment?
“The biggest risk of all is not taking one."
~ Mellody Hobson
