A “good” ROI over five years depends largely on the type of investment, its inherent risk, and the broader economic environment. Still, investors often look at historical performance benchmarks to guide expectations.
Return on Investment, or ROI, is a basic but essential concept in personal finance and investing. It measures how much profit or gain you’ve made on an investment relative to the amount you originally put in.
When stretched over a specific period such as five years, ROI helps assess whether an investment is meeting expectations, lagging behind, or outperforming alternative opportunities.
This article outlines how to calculate ROI, what different levels of return might mean across various assets, and how to determine what a good ROI looks like for you, especially over a five-year horizon.
A five-year time frame is particularly relevant for mid-range planning. It’s long enough for investments to compound and recover from short-term volatility, but not so long that investors can afford to ignore near-term risks.
If you are looking to invest as an expat or high-net-worth individual, which is what I specialize in, you can email me (hello@adamfayed.com) or WhatsApp (+44-7393-450-837).
This includes if you are looking for a free expat portfolio revise service to optimize your investments and identify growth prospects.
Some of the facts might change from the time of writing, and nothing written here is financial, legal, tax or any kind of individual advice, nor a solicitation to invest.
How to Calculate ROI
At its simplest, ROI is calculated using the following formula:
ROI = (Net Profit ÷ Cost of Investment) × 100
For example, if you invest $10,000 and it grows to $15,000 after five years, your net profit is $5,000. Plugging that into the formula:
ROI = ($5,000 ÷ $10,000) × 100 = 50%
This 50% figure represents your total return over five years. However, most investors prefer to annualize this number to compare it to other opportunities.
This is where Compound Annual Growth Rate (CAGR) comes in, as it is a more accurate measure of annualized ROI over a multi-year period.
Using the previous example, a 50% gain over five years equates to a CAGR of roughly 8.45% per year. This means that each year, on average, your investment grew by 8.45%, compounded annually.
Understanding both the total and annualized ROI allows you to make more informed comparisons across asset classes, time horizons, and investment strategies.
It also helps in setting realistic expectations, which is critical when evaluating whether a return is “good” or merely adequate given the risk.
What would be considered a good ROI over 5 years?
Here are some general five-year ROI benchmarks based on historical averages:
- Stock Market (Equities): A diversified portfolio, such as one tracking the S&P 500, has historically returned around 7% to 10% annually, which compounds to roughly 40% to 60% total over five years. This is often considered the baseline for long-term investors.
- Bonos: Government and investment-grade corporate bonds typically yield 2% to 5% annually, resulting in a total five-year return of 10% to 27%, depending on interest rates and bond duration.
- Real Estate: Residential or commercial property investments returns vary wildly depending on a variety of factors, but when combining rental income and appreciation it can be anywhere from 5% to 10%. Over five years, this compounds to around 27% to 60%. However, leverage (e.g., mortgages) can amplify both returns and risks.
- REITs (Real Estate Investment Trusts): Publicly traded REITs have historically produced 6% to 8% annually, and are very comparable to equities in performance with the added income from dividends.
- Private Equity and Venture Capital: These are high-risk, high-return strategies. Five-year ROIs of 50% to 100%+ are not unheard of, but so are total losses. Illiquidity and long holding periods must be considered.
Another way to frame a good ROI is by comparing it to inflation, which erodes the real purchasing power of returns.
If inflation averages 3% per year, then a 5% nominal ROI is only a 2% real ROI. Most investors aim to beat inflation by at least 3–5% annually to justify the risk and maintain wealth growth.
Lastly, taxes reduce realized ROI. Capital gains, interest, and dividends may be taxed differently depending on jurisdiction and investment structure.
Gross ROI should always be assessed alongside net (after-tax) ROI when measuring effectiveness.
Expected ROI for Investors by Risk Profile
Because ROI and risk are inseparable, the level of return one should expect over five years hinges on their risk appetite.
Higher returns are possible only if one accepts the potential for losses or volatility. Here’s how ROI expectations typically map to investor profiles:
Conservative Investors
These individuals prioritize capital preservation over high returns. Their portfolios are often tilted toward bonds, money market funds, and stable dividend-paying stocks.
A good five-year ROI for this group might fall between 15% to 25% total, or 3% to 5% annually. The trade-off is lower returns for peace of mind and reduced volatility.
Moderate Investors
With a mix of equities and fixed income, moderate investors seek growth without extreme exposure to risk.
A typical portfolio might be 60% acciones and 40% bonos. A reasonable five-year ROI expectation here is 30% to 45%, translating to 5% to 8% per year. This range balances the need for long-term growth with a buffer against downturns.
Aggressive Investors
These investors are willing to take on substantial short-term volatility in exchange for higher potential gains.
Their portfolios may be heavily weighted in growth stocks, emerging markets, crypto, or alternative assets.
A strong five-year ROI might exceed 50% to 70%, averaging 10%+ annually, but with greater potential for loss if the market turns.
It’s important to note that risk is not only about losing money. It also includes factors like illiquidity, volatility, and behavioral risk (e.g., panic selling).
Aligning ROI expectations with risk tolerance ensures that investors stay the course even during downturns, which is a crucial factor in reaching long-term goals.
Why is ROI not a good measure of performance?
ROI is a useful benchmark, but it’s far from the only measure that matters. Focusing solely on headline returns can obscure critical considerations:
Risk-Adjusted Return
Two investments may offer the same ROI, but the one with less volatility or uncertainty is typically preferable.
Metrics like the Sharpe Ratio help evaluate return per unit of risk, offering a more complete picture of investment quality.
Liquidity
ROI does not tell you how quickly you can access your capital. Illiquid assets like real estate, private equity, or collectibles may take months or years to liquidate, regardless of ROI.
Liquidity premiums (higher returns for locking up capital) should be factored in.
Time and Effort
Some investments, like owning a rental property or managing a business, may offer high returns but only with significant hands-on effort. Passive investments (like ETFs) might yield lower ROI but require no day-to-day involvement.
Taxation
ROI is usually expressed in gross terms. However, after-tax ROI, that is factoring in capital gains, dividend, or interest taxes, may be far lower depending on your jurisdiction.
Asset location (e.g., taxable account vs. retirement account) and investment structure can materially affect real returns.
Inflation
A 5% ROI in a low-inflation environment (e.g., 2%) might be excellent, but the same 5% in a 6% inflation environment actually represents a negative real return.
Inflation-adjusted (real) ROI is more important for preserving and growing purchasing power.
ROI is just one piece of the puzzle. A well-rounded evaluation of any investment also considers volatility, liquidity, tax efficiency, alignment with personal goals, and sustainability over time.
These qualitative factors often matter as much, if not more, than raw performance.
How to Set a Personal Return on Investment Target
Determining a good ROI ultimately depends on your personal financial goals, investment horizon, and tolerance for risk. Rather than chasing arbitrary benchmarks, investors should define ROI targets that make sense for their specific needs.
You can then evaluate investment options that historically offer returns in this range such as a diversified stock portfolio or a carefully chosen real estate investment.
If your goal is capital preservation with modest growth, a lower target such as 3% to 5% annually may be more appropriate. In this case, income-generating assets like bonds or dividend stocks may suit your profile better.
In all cases, ROI targets should be:
- Realistic: Based on historical performance, adjusted for inflation, and attainable within your risk tolerance.
- Aligned with liquidity needs: If you might need access to funds before the five-year mark, avoid locking up capital in illiquid assets.
- Tax-aware: After-tax ROI is what actually matters. Use tax-advantaged accounts and efficient structures when possible.
- Flexible: Market conditions, interest rates, and life circumstances change. Periodically reassess your ROI expectations and portfolio allocation to stay on track.
Financial advisors or digital planning tools can help model various scenarios and simulate returns based on your investment style, time frame, and income requirements.
What is a good ROI for 5 years?
From what we’ve discussed, there can be no universal benchmark for what makes a good ROI over five years.
This is because for some, beating inflation and preserving capital is sufficient. For others, aggressive growth and capital multiplication are the goals.
What is a good return on investment also largely depends on the investment vehicles carrying your money.
Historical averages suggest that an annualized ROI of 6% to 10% over five years is competitive for diversified portfolios, but this must be weighed against risk, liquidity, effort, and tax implications.
So a good ROI is ultimately one that supports your goals, aligns with your risk appetite, and stands up to long-term planificación financiera.
Instead of asking “what’s the best return I can get?”, the better question might be: “what’s the smartest return I can sustain over time?”
In the end, consistency and discipline matter more than chasing short-term performance.
¿Le duele la indecisión financiera?
Adam es un autor reconocido internacionalmente en temas financieros, con más de 830 millones de respuestas en Quora, un libro muy vendido en Amazon y colaborador de Forbes.
