ROI, CAGR, and Drawdown: The Metrics That Actually Describe a Trade

“How did the trade do?” has three honest answers, and they regularly disagree. A result can have a handsome total return, a mediocre annualized rate, and a stomach-turning path — all at once. The three metrics below each answer one question and quietly hide the other two.

ROI: how much, ignoring time

Return on investment = net profit ÷ total invested × 100, with “invested” including what commissions took at the door. Put in $5,005 (including a $5 fee), get out $6,495 after fees: profit $1,490, ROI +29.77% — the stock profit calculator’s worked example.

What ROI hides is the clock. +29.77% over three months is spectacular; over twelve years it trails savings accounts. ROI is the right number for comparing outcomes of similar duration and for asking “how hard did each invested dollar work” — and the wrong number the moment durations differ.

CAGR: how fast, ignoring the path

Compound annual growth rate = (end ÷ start)^(1/years) − 1: the single steady rate that would have produced your result. $10,000 → $20,000 over ten years is 7.18%/yr — the CAGR calculator’s golden example, and pointedly not 10%/yr, because compounding does part of the work.

CAGR’s blind spot is volatility, and the blindness is systematic, not random. Consider +50% then −50% in consecutive years: the arithmetic average return is 0%, but $10,000 becomes $15,000 and then $7,500 — a CAGR of −13.4%/yr. The gap between the arithmetic mean and CAGR is volatility drag, and it always points the same direction: the arithmetic mean of a bumpy sequence flatters it. Whenever a result is quoted as an “average annual return,” the first question is which average.

Same arithmetic average, three different realities. Only CAGR (equivalently, the end value) tells the truth about wealth.

Drawdown: how bad it got on the way

Maximum drawdown is the largest peak-to-trough fall along the journey — the metric that measures what the other two skip: the experience. A position that ends +40% but visited −45% en route posted a fine CAGR and an experience most holders didn’t survive with their conviction intact.

Drawdown’s sting is asymmetric recovery: the gain that undoes a loss is loss ÷ (1 − loss), so −20% needs +25%, −50% needs +100%, and −95% needs +1,900%. The break-even calculator tabulates the whole curve. This asymmetry is also why drawdown isn’t just an emotional statistic — deep drawdowns mathematically dominate long-run CAGR, which is the sober case for the risk-first arithmetic in the position size calculator.

Using all three at once

A result is honestly described by the triplet: ROI for magnitude, CAGR for rate, drawdown for path. Marketing rarely quotes more than one, and it always picks the flattering one — a high-CAGR fund omits the drawdown; a big-ROI trade omits the decade it took. When you run your own positions through the calculator, you get magnitude directly and rate via CAGR; the path you have to remember honestly. All three describe the past; none of them — a point this site makes wherever numbers appear — predicts anything.