Return on investment is a percentage that tells you how much money you made compared to what you put in

When someone asks "what's the best return on investment," they're asking how much profit you'll make on the money you put somewhere. If you invest $1,000 and it grows to $1,100 in a year, your return is $100, or 10 percent. That 10 percent is your return on investment—often shortened to ROI.

But "best" doesn't have a single answer. A 10 percent return might be excellent if you're keeping your money safe in a savings account, where the real rate is closer to 4 or 5 percent. That same 10 percent would be disappointing if you're buying stocks, where the long-term average is around 10 percent per year. The "best" return depends on what you're comparing it to, how long you can wait for the money to grow, and how much risk you can handle if the investment loses value.

Key Takeaways

  • Return on investment is calculated by dividing your profit by the amount you invested and multiplying by 100 to get a percentage.
  • Higher returns almost always come with higher risk—money in stocks can grow faster but can also drop in value, while savings accounts are safer but grow slower.
  • The "best" return depends on your time horizon: if you need the money in two years, a safe account might be better than stocks even if stocks historically return more.
  • Comparing returns fairly means looking at the same time period and the same type of investment, not mixing a one-year stock return against a five-year bond return.

How to calculate return on investment yourself

The formula is straightforward: take the profit you made, divide it by the amount you invested, and multiply by 100. If you invested $5,000 and it grew to $5,500, your profit is $500. Divide $500 by $5,000 to get 0.10, then multiply by 100 to get 10 percent.

This works the same way whether you're measuring a savings account, a stock, or a certificate of deposit. The catch is that different investments measure their returns differently. A savings account tells you the annual percentage yield (APY), which already accounts for compounding—the way interest earns interest. A stock's return depends on when you bought it and when you sell it. A bond's return depends on whether you hold it to maturity or sell it early. Always check what time period the return covers before you compare two investments.

Why higher returns come with higher risk

Money in a savings account is insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000, so you will not lose it. That safety comes at a cost: the return is low, usually between 4 and 5 percent per year right now. Stocks have historically returned around 10 percent per year over long periods, but they can drop 20 or 30 percent in a single year. Bonds fall somewhere in between—safer than stocks, but lower returns than stocks.

This relationship—more risk for more return—is not a promise. It is a pattern. A risky investment can lose money and still not return much. But if you want a higher return, you have to accept that your money might drop in value before it grows. If you cannot afford to lose the money, a higher return is not worth the risk.

How your time horizon changes what "best" means

If you need the money in two years, stocks are probably not the best choice even though they historically return more. A stock market crash could happen in year one, and you might have to sell at a loss. A high-yield savings account or a short-term bond might return less, but you will have the money when you need it.

If you will not touch the money for 20 years, a stock market crash in year one is actually good news—your money buys more shares at lower prices, and you have two decades for the market to recover. For long time horizons, stocks have historically been the best return. For short time horizons, safety matters more than growth.

Common places to invest and what they typically return

A high-yield savings account currently returns around 4 to 5 percent per year. The money is safe, you can withdraw it anytime, and the return is may provide. The downside is that inflation eats into your gains—if inflation is 3 percent and your account returns 4.5 percent, your real gain is only 1.5 percent.

Certificates of deposit (CDs) lock your money away for a set time—three months, one year, five years—in exchange for a slightly higher return, usually between 4 and 5.5 percent depending on the length. If you withdraw early, you pay a penalty. Bonds are loans you make to a government or company; they return 3 to 6 percent depending on the type and how long you hold them. Stocks have historically returned around 10 percent per year on average, but with years where they return 20 percent and years where they lose 30 percent.

Why comparing returns fairly matters

A common mistake is comparing a one-year stock return to a five-year bond return, or comparing a savings account's return to a stock's best year. These comparisons are meaningless. You need to compare the same time period and the same type of investment.

If you are deciding between a savings account and stocks, compare the average annual return of stocks over the last five or ten years to the current savings account rate. If you are comparing two stocks, compare their returns over the same dates. If one investment is returning 12 percent and another is returning 8 percent, but one is much riskier, the lower return might actually be better for you depending on your situation.

What happens after you calculate your return

Once you know what different investments return, you can decide what fits your goals. If you are saving for something in two years, a savings account or CD makes sense. If you are saving for retirement 30 years away, stocks make sense even though they are riskier. Most people use a mix—some money in safe accounts, some in stocks—so they get some growth without risking everything.

The best return is the one that matches your time horizon, your risk tolerance, and your goals. A 4 percent return on money you will not need for 30 years is not the best return. A 10 percent return on money you need in six months is not the best return, because you might have to sell when the market is down. The best return is the highest one you can get without taking on more risk than you can afford.

Frequently Asked Questions

Is a higher return always better?

No. A higher return usually means higher risk. If you need the money soon or cannot afford to lose it, a lower but safer return is better. The best return is the highest one that matches your situation, not the highest one available.

How do I know if a return is good?

Compare it to similar investments over the same time period. A 5 percent return on a savings account is good right now. A 5 percent return on stocks over five years would be poor, since stocks historically average 10 percent. Always check what you are comparing against.

Can I get a high return with no risk?

No. FDIC-insured accounts are safe but return 4 to 5 percent. Anything promising much higher returns either involves real risk or is not legitimate. If it sounds too good to be true, it is.

What if my investment loses money?

That is a negative return. It happens with stocks and bonds, especially in the short term. If you have a long time horizon, losses are temporary—you can wait for recovery. If you need the money soon, losses are a real problem, which is why time horizon matters.

Should I chase the highest return I can find?

No. Chasing the highest return usually means taking on more risk than you need. A balanced approach—some safe money, some growth money—typically works better than putting everything in the highest-returning option.