Average return on investment: What is a good return?

Before you invest your money, you’re likely wondering how much you’re going to earn. This is known as the rate of return or return on investment. The rate of return is expressed as a percentage of the total amount you invested. If you invest $1,000 and get back your original investment plus an additional $100 in interest, you’ve earned a 10 percent return.

However, numbers don’t always tell the full story. You’ll also need to think about how long you plan to keep the money invested, how your investment options have performed historically and how inflation will impact your bottom line.

Average annualized returns on investments 

When you’re trying to get the best return on investment, you’ll likely start combing through loads of data. A good place to start is looking at the past decade of returns on some of the most common investments.

What is a good return on investment?

There is no simple answer to define what a good return on investment is. You’ll need some additional context on the risk you’re accepting with the investment and the amount of time you’ll need to reap the reward.

Let’s say you need a ride to the airport. It’s 30 minutes away, and you’re running a bit behind schedule. A friend promises to get you there in 15 minutes, but the ride involves driving 100 mph, running red lights, darting in and out of traffic, all the while fearing for your life. Was that “return” of 15 minutes of your time really worth the white-knuckle ride that came with the risks of an accident and injury? Probably not.

Now, think about a real financial example: a 2 percent return. This may not sound impressive, but let’s say you earned that 2 percent in a federally insured, high-yield savings account. In that case, it’s a very good return since you didn’t have to accept any risk whatsoever. If that 2 percent figure came after you spent the past year following Reddit forums to chase the latest meme stock, your return doesn’t look so good. You had to accept loads of risk while likely losing lots of sleep during each large valuation swing.

Long-term vs. short-term investments

When it comes to investing, the adage “time is money” rings true: The longer you leave your money invested, the more you should generally expect to earn. Long-term investments — ideal for retirement and building wealth — offer higher returns but you’ll need to deal with their ups and downs, while short-term investments — best for immediate needs like an emergency fund or a down payment for a house — are typically safer with a lower average rate of return.

Long-term investment examples

• Stocks: From recent IPOs to blue chip stocks, investing in stocks gives you the chance to reap the rewards of a company’s growth. Keep in mind that you’ll also have to endure the company’s losses during tough times and bad quarterly earnings reports.
• Real estate: Whether you’re buying a house to live in or buying another property to rent out, real estate can be an attractive long-term investment. Housing prices tend to rise over time, though they’re not immune from boom-bust cycles.
• Target-date funds: Appropriately named, these funds invest in a mix of asset classes (stocks, bonds and other opportunities) with a specified end date and automatically adjust your risk profile as the target date nears. These are especially well-suited for the long-term goal of retirement.

Short-term investment examples

• Savings accounts: Putting money in a savings account can also pay off with some extra interest. You won’t make much since you have the ability to withdraw the funds at any time and enjoy the protection of FDIC insurance, but some online banks will pay above-average rates.
• Certificates of deposit: Traditional CDs are among the lowest-risk investments. By agreeing to keep your money locked away for a set period of time (6 months or 18 months, for example), a bank or credit union will pay you a slightly higher interest rate than you could get on a savings account.
• T-bills: The U.S. Treasury Department issues bonds to help finance the government’s spending needs, and T-bills have the shortest maturity timelines: as little as four weeks and as long as one year.

What if your investment is below its average?

If your investments are falling short of expectations, follow one essential rule: Don’t panic. One year, the stock market might be up 14 percent. Two years later, it might be down more than 35 percent (as it was in 2008). Earning the average means taking the good with the bad, leaving your money invested and reinvesting all distributions — even when the index is underperforming.

Stocks, real estate and other higher-risk investments can generate negative returns over short time frames. Over longer periods of time, though, these investments can make up lost ground and generate the higher return on investment that attracted your attention in the first place.

Understanding inflation’s impact on your return

You also need to pay close attention to the rate of inflation to get a true picture of what your investment can actually purchase. If you earned a 5 percent return on an investment during a time when inflation increased 5 percent, the after-inflation, or real return on investment, is zero.

Cash investments often trail, or at best, keep pace with inflation. If you keep all your money in CDs and a savings account for decades, the amount of money in your account will increase, but the buying power of that money will likely shrink.

So, for long-term investment goals like retirement, a heavy allocation toward stocks — particularly in the earlier part of your professional career — is a time-tested way to outpace inflation and create wealth. And in times when inflation is running even hotter, it’s important to understand the best investments to hedge against that deflating purchasing power.

Bottom line

“What is a good ROI?” does not have a one-size-fits-all answer. To accurately understand how your return stacks up, you need to have a holistic picture of the bumps and risks along the way. And remember that when you’re talking about investing, it means you’re looking at the big picture and all of the long-term possibilities in front of you — not trading based on the latest news and movements of the market. By diversifying your portfolio across various assets and holding those assets during distressed periods, you’ll be able to optimize your return on investment based on the risks you’re willing to take.

— Bankrate’s Rachel Christian contributed to an update of this story.