Average return on investment: What is a good return?

When it comes to a good return on investment, numbers don’t always tell the full story. You’ll need additional context to accurately assign that subjective “good” to your return.

Last updated on April 14, 2023, and last reviewed by an expert on January 16, 2022.

Before you invest your money, you’re likely wondering how much you’re going to earn. This is known as the rate of return. The rate of return is expressed as a percentage of the total amount you invested. If you invest $1,000 and get back your original investment plus an additional $100 in interest, you’ve earned a 10 percent return.

However, numbers don’t always tell the full story. You’ll also need to think about how long you plan to keep the money invested, how your investment options have performed historically and how inflation will impact your bottom line.

Key return on investment statistics

When you’re trying to get the best return on your investment, you’ll likely start combing through loads of data. A good place to start is looking at the past decade of returns on some of the most common investments:

What is a good return on investment?

There is no simple answer to define a good return on an investment. You’ll need some additional context on the risk you’re accepting with the investment and the amount of time you’ll need to reap the reward.

Suggested read: 8 best short-term investments in 2024

Let’s say you need a ride to the airport. It’s 30 minutes away, and you’re running a bit behind schedule. A friend promises to get you there in 15 minutes, but the ride involves driving 100 mph, running red lights, darting in and out of traffic and fearing for your life. Was that “return” of 15 minutes of your time really worth the white-knuckle ride that came with risks of an accident and injury? Probably not.

Now, think about a real financial example: a 2 percent return. This may not sound impressive, but let’s say you earned that 2 percent in a federally-insured, high-yield savings account. In that case, it’s a very good return since you didn’t have to accept any risk whatsoever. If that 2 percent figure came after you spent the past year following Reddit forums to chase the latest meme stock, your return doesn’t look so good. You had to accept loads of risk while likely losing loads of sleep during each large valuation swing.

Long-term vs. short-term investments

When it comes to investing, the adage of “time is money” rings true: The longer you leave your money invested, the more you should generally expect to earn. Long-term investments — ideal for retirement and building wealth — give you a bigger runway to deal with the ups and downs, while short-term investments — best for immediate needs like an emergency fund or a down payment for a house — are typically safer with a lower average rate of return.

Long-term investment examples

Short-term investment examples

What if your investment is below its average?

If your investments are falling short of expectations, follow one essential rule: Don’t panic. One year, the stock market might be up 14 percent. Two years later, it might be down more than 35 percent (as it was in 2008). Earning the average means taking the good with the bad, leaving your money invested and reinvesting all distributions — even when the index is under-performing.

Suggested read: 11 best investments in 2024

Stocks, real estate and other higher-risk investments can generate negative returns over short time frames. Over longer periods of time, though, these investments can make up lost ground and generate the higher return on investment that attracted your attention in the first place.

Understanding inflation’s impact on your return

You also need to pay close attention to the rate of inflation to get a true picture of what your investment can actually purchase. If you earned a 5 percent return on an investment during a time when inflation increased 5 percent, the after-inflation, or real, return basis, on your return on investment is zero.

Cash investments often trail, or at best, keep pace with inflation. If you keep all your money in CDs and a savings account for decades, the amount of money in your account will increase, but the buying power of that money will likely shrink. So, for long-term investment goals like retirement, a heavy allocation toward stocks — particularly in the earlier part of your professional career — is a time-tested way to outpace inflation and create wealth. And in times when inflation is running even hotter, it’s important to understand the best investments to hedge against that deflating purchasing power.

The bottom line

“What is a good ROI?” does not have a one-size-fits-all answer. To accurately understand how your return stacks up, you need to have a holistic picture of the bumps and risks along the way. And remember that when you’re talking about investing, it means you’re looking at the big picture and all of the long-term possibilities in front of you — not trading based on the latest news and movements of the market. By diversifying your portfolio across various assets and holding those assets during distressed periods, you’ll be able to optimize your return on investment based on the risks you’re willing to take.

Suggested read: Investment time horizon: What it is, why it's important

Share

More articles you might like

People who are reading “Average return on investment: What is a good return?”, also love these articles:

Browse all articles