Return on investment.

Reading the result

Total return is the dollar gain or loss. ROI % is that return divided by your original investment. Annualized ROI smooths the return over the holding period - the only number you should use when comparing investments held for different lengths of time.

What ROI measures, and what it quietly leaves out

ROI is the simplest performance measure there is: gain divided by cost. Its simplicity is why it is everywhere, and also why it is misread. Four things are missing from it, and each one can reverse a decision.

• Time. A 30% ROI over nine months and a 30% ROI over nine years are the same number and completely different outcomes. This is why the annualised figure, not the raw percentage, is the one to compare.
• Risk. ROI has no volatility term. A 9% result from a GIC and a 9% result from a single stock rank identically, which is obviously wrong.
• Cash flow timing. ROI treats one dollar in and one dollar out. If you contributed along the way, or took distributions, the simple calculation overstates or understates your actual result depending on when the money moved.
• Tax. ROI is pre-tax by default, and in Canada the after-tax number depends heavily on the account and on the kind of income.

The Canadian after-tax version

Two investments with identical ROI can leave you with materially different amounts of money, because Canada taxes the three forms of investment income at three different effective rates.

Capital gains are the lightest: only part of a realised gain is included in income, and nothing is taxable at all until you sell, so gains compound untouched in the meantime. Canadian dividends come next, taxed through the gross-up-and-credit mechanism that partially refunds the corporate tax already paid: see the dividend calculator for how that works. Interest is the heaviest, taxed as ordinary income at your full marginal rate, every year, whether you spent it or not.

The account wrapper then multiplies the effect. Inside a TFSA nothing is taxed at all and ROI is ROI. Inside an RRSP the whole withdrawal is taxed as income later, so the comparison depends on your marginal rate then versus now. In a non-registered account, the tax drag lands annually on distributions and reduces the compounding base every year, which is a much bigger effect over decades than most people credit.

The practical implication is that ROI is a fair comparison tool only between investments held in the same account earning the same kind of income. Across account types it is a starting point, not an answer.

ROI, CAGR, IRR and MOIC

Four measures, four questions:

• ROI: total gain relative to cost. No time dimension. Best for a quick read on a completed, single-cash-flow investment.
• CAGR: the constant annual rate that would produce the same result. Use it whenever holding periods differ; the CAGR calculator does exactly this.
• IRR: a money-weighted rate that handles contributions and withdrawals at the times they actually happened. This is the honest measure of your return on a portfolio you have been adding to.
• MOIC: a multiple rather than a percentage, standard in private equity and venture. A 3× MOIC is a 200% ROI stated differently, which is worth knowing when reading a fund report.

The common error is comparing a time-weighted figure to a money-weighted one. A fund can report a strong CAGR while an investor who bought in at the top has a poor IRR, and neither number is wrong: they are measuring the fund and the investor respectively.