ROI is a way to measure an investment’s performance. As you’d expect, it’s also a great way to compare the profitability of different investments. Curious how to measure this for your own portfolio? Let’s read on.ROI measures the return on invested capital (ROIC).
Introduction
Whether you’re day trading, swing trading, or a long-term investor, you should always measure your performance
- One of the great benefits of trading is that you can rigorously measure how you’re doing with objective metrics
- This can greatly help eliminate emotional and cognitive biases
- How do you measure the performance of your investments?
The limitations of ROI
It doesn’t account for time period.
- A higher ROI does not necessarily mean a better investment, especially if you can’t find anyone willing to buy your investment and get stuck with it for a long period of time
- Another factor to consider is risk. An investment might have a very high prospective ROI, but at what cost?
Closing thoughts
The return on investment formula is a core part of tracking the performance of any portfolio, investment, or business
What is Return on Investment (ROI)?
ROI measures the gains or losses compared to the initial investment.
- In other words, it’s an approximation of an investment’s profitability. Compared to the original investment, a positive ROI means profits, and a negative ROI = losses.
Calculating Return on Investment (ROI)
Take the current value of the investment and subtract the original investment cost.
- Then, divide this sum by the original cost and return the investment
- ROI = (current value – original cost) / original cost
- Calculate ROI while taking into account the expenses.
