When you invest your money, you want to measure the productivity of your investments. Return on investment, or ROI, accounts for not only your profit or loss but also the size of your investment. For example, if you have two investment opportunities promising $1,000 profits, but one requires a buy-in of $5,000 and the other requires $20,000, all else being equal, the one with the smaller required investment is the better option. Keep reading to learn how to spot safe investments with high returns.
How to Calculate ROI
To calculate your ROI, you need to know the profit or loss generated by your investment and the amount of money you invested. Here’s how to calculate ROI:
- First, calculate your profit or loss generated by your investment. This includes all income from the investment, such as stock dividends paid while you owned the investment, and all expenses, such as commissions or trading fees and taxes on profits, subtracted from your initial investment.
- Then, divide the profit or loss by the amount invested. Finally, multiply by 100 to calculate your ROI as a percentage.
For example, say that you invested $1,000 in a stock and then sold it for $1,230, but also received $30 in dividends and paid a total of $15 in transaction fees and $45 in income taxes on your profits. First, calculate your profits by subtracting $1,060, your total costs, from $1,260, your total return, to find you netted a $200 profit. Then, divide $200 by $1,000 to get 0.2. Finally, multiply 0.2 by 100 to find your ROI equals 20 percent.
How to Invest Money to Boost ROI
Before you look for investment options that offer the highest ROIs when deciding how to invest money, consider how much risk you’re willing to take on. Often, the best investments for generating the highest ROIs also carry the highest risk. For example, primarily investing in stocks might be fine if you’re in your 30s and saving for retirement, but that might not be a safe investment for money that you need to have saved for your house down payment in six months. Alternatively, an investment property could be on your list of good investments for ROI, but it involves a lot of work in finding and managing tenants and keeping up the property.
Tips for Maximizing ROI
Incorporate the following tips to help improve your ROI:
- Invest for the long term: If you day trade, you could end up making or losing a lot of money, but either way, you’ll end up paying more in transaction costs, which will lower your ROI.
- Incorporate tax planning into your investment strategy: Although you shouldn’t base your investment decisions only on taxes, minimizing the taxes you’ll owe, such as timing your sales to ensure gains qualify for the lower long-term capital gains rates or using tax loss harvesting, can raise your ROI by reducing the cost of taxes.
- Avoid market timing and invest for the long term: It might sound simple, but buying when prices are low and selling when stocks hit their peak is actually very hard to pull off. Instead, invest for the long term. There has never been a 20-year period where the Dow Jones ended lower than it started. Owning a home might be exciting, but sometimes, boring investments are more profitable.
Click to see 10 low-risk investment options for your money.
More on Investing