Financial Glossary: Return on Investment
‘Return on investment’ (ROI) is a term that I have no doubt you will have heard before. It is one of the many phrases that all financial advisers like to throw out there and there is a simple reason for this; ROI is a simple and flexible way of measuring investment value. ROI is expressed as a percentage, i.e. “you should receive a 20% return on investment”. To someone who knows what they are talking about, the meaning behind this statement is pretty clear but to someone seeking advice, the percentage may fly over your head a bit. So what does ROI really mean for you?
ROI is a very simple way of calculating the profitability of an investment, simply taking into account the cost of the investment and the overall gain which you receive from it. It is calculated by subtracting the cost from the gain (revealing basic profit value) and then dividing this value by the cost (to convert the profit into a percentage of the cost).
Value of ROI:
ROI is a great way of quickly comparing the profitability or potential profitability of a number of investments to provide a guide as to the best investment avenue to take. If investment A has a potential 25% ROI and Investment B, 30%, then you have a clear indication that B is probably the way to go (assuming that you are taking a positive gearing approach). ROI can also provide a basic indication of the efficiency of an investment. For example, if you know you have held your shares or your property for 8 years and you are expecting to receive a 12% return, you have a reasonable indication of the average gain per year and the efficiency of this asset as an investment avenue. A 12% return in 8 years is a very different indication of efficiency when applying it to a shares portfolio vs a property. If you know the context, you should have a pretty good idea of efficiency (and thus value) in each situation. If not, that is what your adviser is for.
So now you know the basics of ROI and what this value means for your financial situation. If you would like to talk to a financial adviser about your investments, go to the enquire & book page to book a consultation with one of our friendly Ipswich or Brisbane advisers. Alternatively, call us on the number provided at the top of the page.