Short answer
ROI is the total gain divided by what you put in. CAGR turns that gain into a steady yearly rate: (ending value / starting value)^(1 / years) − 1. Subtract inflation to get your real return.
1. ROI: the total gain
ROI = (ending value − starting value) ÷ starting value. If $10,000 grows to $22,000, the ROI is 120%. ROI says nothing about time, so a 120% gain over 3 years and over 30 years look identical.
2. CAGR: the yearly rate
CAGR = (ending ÷ starting)^(1 ÷ years) − 1. For the same $10,000 growing to $22,000 over 8 years, CAGR is (2.2)^(1/8) − 1 ≈ 10.36% a year.
| Years held | Start | End | ROI | CAGR |
|---|---|---|---|---|
| 8 | $10,000 | $22,000 | 120% | 10.36% |
| 3 | $10,000 | $22,000 | 120% | 30.1% |
The same ROI means a very different annual return depending on the holding period.
3. When you add money every month
CAGR assumes no deposits or withdrawals in between. If you invest regularly, use the compound growth formula with contributions: future value = P × (1 + i)n + C × ((1 + i)n − 1) ÷ i, with i the monthly rate and n the number of months.
Example: $10,000 plus $300 a month at 8% for 20 years ends at $225,974. You contributed $82,000, so $143,974 is investment growth.
4. Real return after inflation
Real return = (1 + nominal) ÷ (1 + inflation) − 1. An 8% return with 3% inflation is about 4.85% real. The $225,974 above is worth about $125,116 in today's dollars after 20 years of 3% inflation.
5. What fees do to the result
| Return after fees | Ending balance (same $10,000 + $300/month, 20 years) |
|---|---|
| 8% | $225,974 |
| 7% (a 1 point annual fee) | $196,665 |
That 1 percentage point costs about $29,300, roughly 13% of the final balance. Fees compound, so enter your return after fees.
6. Common mistakes
- Comparing ROI figures for investments held for different lengths of time.
- Using CAGR on an account where you added or withdrew money.
- Forgetting inflation, which makes a nominal balance look larger than its buying power.
- Assuming a constant return. Real markets move unevenly, so treat any projection as an estimate, not a promise.
7. Frequently asked questions
How do you calculate the rate of return on an investment?expand_more
For a total return, divide the gain by the starting value: (ending value - starting value) / starting value. For a yearly rate, use CAGR: (ending / starting)^(1 / years) - 1.
Is ROI or CAGR better?expand_more
CAGR is better for comparing investments held for different lengths of time because it gives a yearly rate. ROI is fine for a single holding period when you only want the total gain.
Does CAGR work when I add money every month?expand_more
Not directly. CAGR assumes one starting amount and one ending amount with no deposits in between, so regular contributions make it overstate your return. Use a calculator that models contributions, or a money-weighted return.
What return should I use in an investment calculator?expand_more
Use a range, not one number. Run a conservative and an optimistic rate, and enter your return after fees, since fees reduce what you keep every year.