Understanding what qualifies as a good return on investment (ROI) in the USA is more than just crunching numbers. As someone who has spent years analyzing financial trends and dissecting balance sheets, I can tell you that ROI is not just a figure you plug into a spreadsheet. It’s context-dependent, shaped by inflation rates, market conditions, opportunity cost, and risk tolerance. So in this guide, I’m going to walk you through the many angles to this question, provide examples with calculations, and break down what a good ROI looks like across investment types.
Table of Contents
What Is ROI and How Do We Calculate It?
Let me begin with the basics. ROI measures the gain or loss generated on an investment relative to its cost. The formula is simple:
ROI = \frac{\text{Net Profit}}{\text{Cost of Investment}} \times 100Let’s say I invested $10,000 in stocks and sold the investment after a year for $12,000. My ROI would be:
ROI = \frac{12,000 - 10,000}{10,000} \times 100 = 20%It sounds great on paper, but this 20% return may not be as good as it looks if inflation is high or if the same amount could’ve yielded more elsewhere.
Comparing ROI Across Asset Classes
Different asset classes yield different average returns. I’ll show you how they compare.
| Asset Class | Average Annual ROI (US-based, Historical) | Typical Risk Level |
|---|---|---|
| S&P 500 Stocks | 7% to 10% (after inflation) | Moderate to High |
| Bonds | 2% to 4% | Low to Moderate |
| Real Estate | 8% to 12% (varies widely by region) | Moderate |
| Savings Accounts | 0.01% to 1.5% | Very Low |
| CDs | 1.5% to 5% (based on interest rates) | Low |
| Mutual Funds | 6% to 9% | Moderate |
| Small Businesses | Varies (can exceed 20%) | Very High |
The first time I compared the ROI of stocks with real estate, I noticed that stocks had better liquidity but higher volatility. Real estate, on the other hand, required more upfront effort but provided consistent cash flow and tax benefits.
Inflation and Its Impact on ROI
Inflation changes the real value of ROI. The formula to calculate real ROI after inflation is:
\text{Real ROI} = \frac{1 + \text{Nominal ROI}}{1 + \text{Inflation Rate}} - 1Assume I earned a nominal ROI of 10% in a year when inflation was 4%. The real ROI would be:
\text{Real ROI} = \frac{1 + 0.10}{1 + 0.04} - 1 = 0.0577 = 5.77%So that 10% is really closer to 5.77% in actual purchasing power.
Time Horizon and Compound Interest
One thing I always consider when evaluating an investment’s ROI is time. Compound interest magnifies returns over longer periods. Here’s the compound interest formula:
A = P(1 + r)^tWhere:
- A is the future value of the investment
- P is the principal
- r is the annual interest rate
- t is the time in years
Suppose I invest $5,000 at an annual ROI of 7% for 10 years:
A = 5000(1 + 0.07)^{10} = 5000(1.967151) = 9835.76My $5,000 nearly doubles in a decade due to compounding.
Risk vs. Return: The Trade-Off I Always Assess
Risk tolerance varies from person to person. A good ROI for a retiree might be a stable 4% from municipal bonds. For someone in their 20s, a 12% ROI from stocks or ETFs may be acceptable despite the volatility. Here’s a simple risk-reward comparison:
| Investor Type | Preferred Asset | Average ROI Goal | Risk Tolerance |
|---|---|---|---|
| Retiree | Bonds/CDs | 3% to 5% | Low |
| Mid-Career | Real Estate/ETFs | 6% to 9% | Moderate |
| Young Investor | Stocks/Crypto | 10%+ | High |
Opportunity Cost and Benchmarking ROI
Whenever I put money into an investment, I think about what I’m giving up. That’s the opportunity cost. If I could’ve invested in an S&P 500 index fund earning 8% and instead chose something earning 5%, my opportunity cost is 3%.
Benchmarks help in measuring performance. The S&P 500 is the most common benchmark in the US. If my investment earns 9% while the S&P 500 earns 10%, my ROI may not be so good in relative terms.
Taxes Can Shrink ROI
I always factor in capital gains tax, dividend tax, and property tax when calculating ROI. Here’s a quick overview of tax impact:
| Investment Type | Tax Type | Typical Tax Rate (Federal) |
|---|---|---|
| Stocks | Capital Gains | 0%, 15%, or 20% |
| Dividends | Dividend Tax | 10% to 37% |
| Real Estate | Property Tax | Varies by State |
| Business Income | Income Tax | Up to 37% |
If I sold a stock for $5,000 profit after holding it for over a year, and I fall in the 15% long-term capital gains tax bracket, I’d pay:
Tax = 5000 \times 0.15 = 750So, my net gain becomes $4,250, affecting the real ROI.
ROI Examples: Real-Life Scenarios
Scenario 1: Stock Investment
Initial Investment: $8,000 Ending Value: $10,000 Capital Gains Tax Rate: 15%
ROI_{nominal} = \frac{10,000 - 8,000}{8,000} \times 100 = 25%Tax = (10,000 - 8,000) \times 0.15 = 300
Net Profit = 2,000 - 300 = 1,700
ROI_{after\ tax} = \frac{1,700}{8,000} \times 100 = 21.25%Scenario 2: Real Estate Investment
Purchase Price: $250,000 Rental Income: $18,000/year Expenses (maintenance, tax, insurance): $8,000/year
Net Income = 18,000 - 8,000 = 10,000
ROI = \frac{10,000}{250,000} \times 100 = 4%But if I sold the property for $300,000 after 5 years:
Capital Gain = 50,000
Total ROI (ignoring depreciation, for simplicity) = \frac{(5 \times 10,000) + 50,000}{250,000} \times 100 = 30%
Annualized ROI = (1 + 0.30)^{\frac{1}{5}} - 1 = 0.0539 = 5.39%
What Is a “Good” ROI Then?
In the US context, here’s how I define a good ROI:
- Savings: Anything above 2% annually (beats inflation)
- Bonds: 4% to 5%
- Real Estate: 6% to 8% annually, or more with appreciation
- Stocks: 7% to 10% long-term
- Small Business: 15%+, given the high risk
A good ROI must beat inflation, match or exceed market benchmarks, and align with risk tolerance.
Final Thoughts: Context Matters
There’s no single number that defines a good ROI. It’s shaped by your age, goals, tax situation, and market alternatives. Personally, I use ROI as a comparative metric, not a decision-maker by itself. I always combine it with qualitative factors like cash flow, scalability, and liquidity. Whether you’re investing in real estate, stocks, or your own business, understanding your expected return and comparing it against risk and alternatives is what makes the number meaningful.
And that’s how I assess whether an investment in the US gives a good return. Not by chasing the highest number, but by evaluating how that number fits into a broader financial picture.
