Why a 30% Return Might Be a Bad One

Someone tells you an investment returned 30%. You cannot tell whether that is good.

It is not a trick question and they are not necessarily hiding anything. The number is simply incomplete, and the missing piece changes the answer entirely.

The same return, four verdicts

Held for	Total return	Annualised	Verdict
1 year	30%	30%	Excellent
3 years	30%	9.1%	Good
5 years	30%	5.4%	Modest
10 years	30%	2.7%	Below inflation

The ten-year version is not a mediocre investment. It is a loss in real terms, because your money bought less at the end than at the start.

The formula that makes returns comparable

CAGR = ((final / initial) ^ (1 / years) - 1) x 100

Compound annual growth rate is the steady yearly rate that would have taken you from the start value to the end value. Real returns are never that smooth, which does not matter: the point is to put investments held for different periods on the same footing.

Anyone quoting a total return without the period is being careless or hoping you will not ask. It is worth asking.

The costs that turn a good return into a poor one

ROI is only as honest as the cost side, and the cost side is where flattering numbers come from.

Fees on the way in and out. Often small individually and not always disclosed prominently.

Ongoing charges. A 0.5% annual platform fee against a 6% return is over 8% of your growth, every year, compounded. Across thirty years that is a substantial share of the final figure.

Tax on gains, which is a real reduction in what you keep.

Holding costs. Property, vehicles and equipment need maintaining, insuring and storing.

Your own time. The most commonly omitted and frequently the largest. A side project returning 5,000 on 1,000 of materials looks like a 400% return until you count the 200 hours, at which point it paid 20 an hour before tax.

Opportunity cost. What the money would have earned somewhere safe and boring. Beating zero is not the bar. Beating the alternative is.

Inflation is not optional

Nominal returns describe the number. Real returns describe what it buys.

Turning 10,000 into 13,000 over five years is 5.4% a year nominal. At 2.5% inflation, that is roughly 2.8% real, and your 13,000 buys about what 11,500 would have bought when you started.

Over decades this dominates everything else. A 7% nominal return during 3% inflation doubles your purchasing power in roughly 18 years, not the 10 the nominal figure implies.

The rule of 72

Divide 72 by the annual return to estimate the years until money doubles.

• At 6%: twelve years
• At 9%: eight years
• At 3%: twenty-four years

Accurate enough between about 4% and 12% to do in your head, and it makes fees vivid. A 1% platform charge against a 7% return pushes doubling from roughly ten years to twelve. That is two years of your life, expressed as a percentage nobody reads.

What ROI cannot tell you

Risk. Two investments returning 8% are not equivalent if one was a government bond and the other a single company that nearly went under. ROI is calculated after the fact and says nothing about how likely the outcome was, or how close you came to a different one.

Sequence. A steady 8% and a violent ride averaging 8% end in the same place only if you never had to sell partway through. If you did, they are entirely different investments.

Survivorship. You can only calculate a return on something you still hold. Portfolios, property strategies and business ventures all look considerably better when the failures are quietly left out of the denominator.

Whether it continues. An ROI measures the past. It is evidence about the future only insofar as the conditions that produced it persist, and that is a judgement rather than a calculation.

The practical version

When someone quotes a return, ask three questions:

1. Over what period? Without this the number means nothing.
2. After what costs? Fees, tax, time.
3. Compared to what? A safe alternative over the same period.

If the answer to all three is satisfactory, it was probably a good investment. The ROI calculator will do the annualising and the inflation adjustment, which is the part people skip.

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Arithmetic for comparing outcomes, not financial advice. Past returns do not indicate future ones, and investments can lose value.