Something I have been struggling with recently is how to evaluate investments based on yield vs ROI considerations. The reason I struggle with it is that I get conflicting answers where the investment is great from a yield perspective (by which I mean "units of money earned for each unit of money invested") but terrible from a ROI perspective ("did I get more money out than I put in").

Here is my specific example: a few years ago I invested 30k EUR into a P2P crowd lending platform. This investment currently yields more than 10% or 300 EUR per month. This would suggest this is a pretty good investment even compared to high yield bonds at current rates?

However, when you drill into the account statement, you find that the original 30K EUR investment has grown to 34K EUR, but out of this 6K EUR are bound in either late or defaulted loans. This means only 28K EUR are actually contributing to this 10% yield and if I would try to pull my investment of 30K EUR back out, well, I couldn't; I would only get 28K EUR back for a net loss of 2K EUR. Which seems to suggest that the ROI is currently negative, so technically my net worth shrunk, meaning it's a bad investment?

How do you resolve this conundrum? I still think of it as a good investment, because frankly, I don't need this money, and won't for the foreseeable future, so I'm pretty happy with the income stream this produces. But it still rubs me the wrong way that technically, money was lost, or would be lost, were I to pull out of it.

How do you rationalize these kinds of investments that produce great yields in terms of income streams, but may actually produce losses when pulling back out? Something that resonated greatly with me recently was the insight someone shared that optimizing for high net worth alone is meaningless; what one should optimize for is to produce income streams that cover or exceed one's cost of living. So does "good vs bad investment" depend on personal goals or your thought framework just as much as it does on objective criteria, or am I fooling myself here?


1 Answer 1


Simply speaking, yield is about coupons/dividends vs the price you pay, whereas ROI is your (total) return, i.e. cashflows and price appreciation.

Put differently, yield reflects the current conditions, whereas ROI can only be evaluated after the fact (although it can be estimated, based on your assumptions)

They may be related but are really separate concepts. Some investments have a great ROI although their yield is low or zero (tech stocks, currencies, commodities, to name a few examples).

  • 1
    And yield or ROI are not real until you cash out. Neither are losses, if there is a reasonable chance of recovering. Which is part of what you're seeing here -- you haven't accepted that losses count directly against returns and that you can and will sometimes lose money as a lender.
    – keshlam
    Mar 4, 2023 at 18:16
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    That makes sense to me, thanks.
    – mxk
    Mar 5, 2023 at 18:30

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