Why a multi-year ROI is not an annual return
Simple ROI measures the total return over the holding period. Investments with different durations cannot be compared fairly by treating that percentage as if each were earned in one year.
Return on investment calculator →Label the period beside the result
A change from cost to final value may span a month, a year or many years. The ROI tool does not read acquisition and sale dates and does not automatically annualize its output. Record the holding period alongside the percentage. A larger total return earned over much longer can imply a different annual growth rate from a smaller return earned quickly.
Calculate an equivalent annual rate
Start with 10,000 and finish with 12,100 after two years, with no intermediate cash flows or expenses. Total ROI is 21%. The constant annual rate that produces the same endpoint is √1.21 − 1 = 10%, not 10.5% from dividing 21% by two. Annualization compounds the growth factors; simple division does not reproduce the same final value.
Use a more suitable method for intermediate cash flows
Contributions, withdrawals or distributions during the period can make a simple starting-and-ending formula unsuitable for measuring annualized performance. The ROI amounts can still help reconcile costs and proceeds, but cash-flow timing requires its own analysis. The equivalent annual rate in the example is a mathematical summary, not a guarantee for the next year or a description of the investment’s volatility and risk.
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