What is a good return on investment? It is one of the most Googled questions in personal finance, and most of the answers you will find are unhelpfully vague. "It depends." "Anything above inflation." "10% is the stock market average." None of these answers are wrong, exactly — but none of them help you make a specific decision about a specific investment.
Here is the honest answer: a good return is one that compensates you fairly for the risk you are taking. The risk-free return — what you get with zero risk — is your baseline. Every investment that carries risk should return more than that baseline. How much more depends on how much risk you are taking.
The baseline: the risk-free rate
The risk-free rate is what you earn on the safest investment available — typically a short-term government bond. In the US, that is the 10-year Treasury yield; in the UK, the 10-year gilt yield; in Canada, the 10-year Government of Canada bond; in Australia, the 10-year Australian Government Bond. At the time of writing, these are all in the 4–5% range. If someone promises you a 4% return with no risk, that is not a good deal — you can get that from the government with essentially zero chance of losing your principal.
What different investments should return
A diversified stock market index fund — the S&P 500, the FTSE All-World, the ASX 200, the TSX Composite — has historically returned around 10% annually in nominal terms, or 7% after inflation. That extra 5–6% above the risk-free rate is your compensation for accepting the volatility of equity markets. In a bad year you might lose 30%. In a good year you might gain 25%. The average, over long periods, has been around 10%.
For individual stocks, a good return depends on the stock's risk relative to the market. A stable utility company with a beta of 0.6 should return less than the market — around 7–8%. A high-growth technology stock with a beta of 1.8 should return significantly more — around 14–15% — to justify the extra risk. If a risky stock is only expected to return 8%, it is not a good investment relative to the risk you are accepting.
For private business investments — buying a stake in or lending to a private company — returns need to be considerably higher than public markets. Illiquidity (you cannot sell easily), concentration (one company, not thousands), and higher failure rates all demand compensation. Returns of 15–25% or more are typical expectations for small business investors and angel investors.
Property: the most misunderstood return
Residential property returns are frequently overstated. People cite the sale price appreciation but forget to deduct transaction costs, maintenance, property management, insurance, vacancy periods, and the interest on any mortgage. A property that doubles in value over 15 years sounds impressive until you calculate that it returned about 4.7% per year — possibly less than inflation, and certainly less than a stock index fund over the same period with zero management effort.
That does not mean property is a bad investment — leverage (borrowing to buy) can amplify equity returns significantly, and rental income provides cash flow that stocks do not. But the headline "my property went from $300,000 to $600,000" is not a return on investment. The actual return depends on everything that happened in between.
How to calculate the return you should demand
The CAPM (Capital Asset Pricing Model) gives you a mathematically grounded answer. Take the risk-free rate, add the equity risk premium (historically around 5–6% in developed markets), and multiply the risk premium by the investment's beta — a measure of its risk relative to the market. The result is the minimum return you should demand before making the investment.
If the investment's expected return is above that number, it is attractive. If it is below, you would be better off in a passive index fund with less effort and more liquidity.