How to Calculate Your Investment Return (ROI, CAGR, and What They Actually Mean)

Return on Investment (ROI) = (Current Value − Initial Investment) ÷ Initial Investment × 100

Example: you invested $10,000 and it's now worth $14,000. ROI = ($14,000 − $10,000) ÷ $10,000 = 40%.

Simple, but limited. It ignores how long the investment has been held. A 40% return in 2 years is very different from 40% in 10 years. For time-adjusted analysis, you need CAGR.

Compound Annual Growth Rate (CAGR) expresses what a constant annual return would produce the same total growth. Formula:

CAGR = (Ending Value ÷ Beginning Value)^(1 ÷ Years) − 1

$10,000 growing to $14,000 over 3 years: CAGR = (14,000 ÷ 10,000)^(1/3) − 1 = 1.4^0.333 − 1 ≈ 11.9%/year

Nominal return is what your brokerage statement shows. Real return is what actually happened to your purchasing power.

Real return ≈ Nominal return − Inflation rate (approximate)

More precisely: Real return = (1 + nominal rate) ÷ (1 + inflation rate) − 1

• 10% nominal return at 3% inflation → 6.8% real return
• 7% nominal return at 4% inflation → 2.9% real return
• 4% HYSA at 5% inflation → -0.9% real return (you're losing ground)

Investment fees compound just like returns — but in the wrong direction. Expense ratios on actively managed funds often run 0.5–1.5% annually.

• $100,000 at 8% gross return for 30 years = $1,006,265
• Same with 1% annual fee (7% net): $761,225
• Difference: $245,040 — almost a quarter million dollars lost to fees

Low-cost index funds from Vanguard, Fidelity, and Schwab typically charge 0.03–0.20% expense ratios. This single factor explains a large portion of why index funds outperform most active funds over 10+ year horizons.