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What way of calculating ROI makes it easiest to compare investments?
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GPT-5 mini
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The easiest, most comparable way is to express returns on an annualized (compound) basis — i.e., the compound annual growth rate (CAGR) or a time‑weighted annual return. Which one to use depends on the situation:
- For a single buy-and-hold investment (one starting value and one ending value): use CAGR = (Ending / Beginning)^(1/years) − 1.
Example: $100 → $150 in 3 years: CAGR = (150/100)^(1/3) − 1 = 14.47% p.a.
- For comparing performance of managers or investments when the investor’s cash flows (deposits/withdrawals) differ: use the time-weighted rate of return (TWRR). TWRR neutralizes the effect of investor cash flows and shows the manager’s compound performance.
- For measuring the actual return experienced by an investor with irregular cash flows (their personal performance): use an internal rate of return (IRR/XIRR). IRR is money-weighted and reflects timing of contributions/withdrawals.
Also consider:
- Use percentages not absolute dollars to compare different-sized investments.
- If risk differs, compare risk‑adjusted measures (e.g., Sharpe ratio) rather than raw ROI.
- Always compare returns net of fees, and be mindful of taxes and inflation when relevant.
In short: for ease and direct comparability across durations, use annualized (CAGR) returns; for manager comparisons use time‑weighted returns; for investor-specific performance use IRR/XIRR.
- For a single buy-and-hold investment (one starting value and one ending value): use CAGR = (Ending / Beginning)^(1/years) − 1.
Example: $100 → $150 in 3 years: CAGR = (150/100)^(1/3) − 1 = 14.47% p.a.
- For comparing performance of managers or investments when the investor’s cash flows (deposits/withdrawals) differ: use the time-weighted rate of return (TWRR). TWRR neutralizes the effect of investor cash flows and shows the manager’s compound performance.
- For measuring the actual return experienced by an investor with irregular cash flows (their personal performance): use an internal rate of return (IRR/XIRR). IRR is money-weighted and reflects timing of contributions/withdrawals.
Also consider:
- Use percentages not absolute dollars to compare different-sized investments.
- If risk differs, compare risk‑adjusted measures (e.g., Sharpe ratio) rather than raw ROI.
- Always compare returns net of fees, and be mindful of taxes and inflation when relevant.
In short: for ease and direct comparability across durations, use annualized (CAGR) returns; for manager comparisons use time‑weighted returns; for investor-specific performance use IRR/XIRR.
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