## How to Effectively Assess the Return on Your Investments? ROI Formula for Working with a Portfolio

If you trade cryptocurrencies, stocks, or any other assets, you have certainly asked yourself the question: how do I know if I'm doing well? The answer is simple - you need to measure the performance of your investments. Count on numbers, not feelings.

People have a natural tendency to create stories about their decisions. While your brain may convince you that the investment is going well, hard data will tell you the truth. By tracking the ROI formula and performance metrics, you eliminate emotional biases and see a clear picture of your trades.

Why is it so important? Because without objective measurement, you can fall victim to cognitive biases. Do you feel successful, but the numbers tell a different story? Or conversely - do the numbers show profits that you haven't noticed? The formula for calculating return on investment will give you clarity.

## What exactly is ROI and why should you care

Return on investment is not just something that reckless analysts calculate. It is a fundamental tool for anyone who wants to understand their financial situation. ROI allows you to measure whether your investment is generating profits or losses compared to how much you originally invested.

Positive ROI means profits, negative ROI means losses. But it also has a bigger meaning - ROI allows you to compare completely different investments on the same scale. This makes it easy for you to decide where to invest more money.

ROI is practically used everywhere - not only in trading cryptocurrencies or stocks. If you want to start a business or buy real estate, calculating the return on investment will help you understand whether it makes financial sense.

## Practical example: How the ROI formula works in real life

Imagine that you bought an old collectible car for 200,000 USD. You used it for two years and invested an additional 50,000 USD in maintenance and repairs. Then the market changed and cars of this type became more expensive. Now you could sell it for 300,000 USD.

If you want to know your return on investment without taking expenses into account:

**ROI = (300 000 - 200 000) / 200 000 = 0.5**

That means a 50% return. But wait - you forgot about the expenses! When you factor in the $50,000 you invested in maintenance:

**Net worth = 300,000 - 50,000 = 250,000 USD**

**ROI = (250 000 - 200 000) / 200 000 = 0.25**

Now you have a more realistic picture - your return on investment is 25%, which means a net profit of 50,000 USD. Do you see the difference? The exact calculation gives you the right idea.

## Basic ROI formula you need to know

The calculation is not complicated. Here is a simple formula:

**ROI = (Current Value - Original Investment) / Original Investment**

This is the basic formula. If you want to see the result in percentages, multiply it by 100.

This formula is used constantly in trading. If you bought Bitcoin for 40,000 USD and can now sell it for 50,000 USD, your ROI is:

**ROI = (50 000 - 40 000) / 40 000 = 0.25 or 25%**

A simple way to clarify whether your trade paid off.

## Where ROI Meets Reality - Its Limitations

ROI is a great tool, but it is not omnipotent. There are situations where ROI alone is not enough.

**Time Problem:** ROI does not take into account how long you have waited for your money. An investment with a 50% ROI in a year is better than an investment with a 50% ROI over five years - time is crucial in finance. That is why annual ROI is discussed.

**Liquidity problem:** What if there is no one to buy your investment? If your investment has very low liquidity, you might hold onto it for a long time and not be able to use it when you need it.

**Risk Problem:** Here is the most important thing. An investment may have a high potential ROI, but if there is an 80% chance that you will lose everything, it is extremely risky. High returns make no sense if they can be lost due to high risk.

So never look only at ROI. Consider the risk-reward ratio as well. It will help you make decisions that make sense.

## Other factors you should monitor

ROI is the starting point, but not the end of the story. Professional analysts also look at the following when evaluating investments:

- Cash flows and their stability
- Security and reliability of the asset
- Opportunity cost - what would you do with the money otherwise
- Tax implications and fees

The combination of these factors will give you a complete picture.

## Conclusion: ROI is your compass, not your map

The ROI formula provides you with a basis for understanding the performance of your investments. It is simple, easy to understand, and universal. But remember - it is just one of the basic tools.

When making investment decisions, let ROI guide you, but also consider time, liquidity, risk, and other factors. ROI is your compass towards better investment decisions, but it is not a map to wealth.