Safely Making Five-Fold Returns On Your Investments

In today's economic climate, it can be challenging to find safe investments that provide a good return. With inflation eating away at savings, it is crucial to explore various options to stay ahead of the curve. While there are no guarantees in the world of investments, here are some relatively safe options that can help you achieve a 5% return or more on your investments.

Invest in the stock market

Investing in the stock market can be a powerful way to grow your wealth over time. It involves purchasing shares of ownership in a public company, with the hope that the company will grow and perform well in the stock market, resulting in gains on your investment.

• Set clear investment goals: Begin by specifying your financial objectives. Clear goals will guide your investment decisions and help you stay focused. Consider both short-term and long-term goals, as the timeline will impact your investment strategy.
• Determine how much you can invest: Assess your financial situation to decide how much money you can comfortably invest in stocks. This step ensures that you are investing responsibly without compromising your financial stability.
• Understand your risk tolerance: Reflect on your comfort level with the inherent risks of the stock market. Are you willing to take on more risk for potentially greater returns, or do you prefer stability? Your risk tolerance will influence the types of stocks and investments you choose.
• Choose a brokerage account: You'll need a brokerage account to start investing in stocks. Compare different brokers and account types to find one that suits your goals, risk tolerance, and investment style. Some factors to consider include fees, investment options, and customer support.
• Fund your account: Decide how you will fund your brokerage account. You can typically use methods such as bank transfer, check deposit, or transfer from another brokerage account. Consider setting up automatic contributions to invest at regular intervals, helping you stay on track with your investment goals.
• Pick your stocks: When starting, look for stability, a strong track record, and the potential for steady growth. Examples include blue-chip stocks (large, well-established companies), dividend stocks (companies that pay regular dividends), defensive stocks (industries that perform well during economic downturns), and ETFs (exchange-traded funds that track market indexes).
• Monitor and review: Stay informed about the companies you invest in and the global economy. Regularly review your investment portfolio to ensure it aligns with your financial goals and risk tolerance.

Remember, investing in the stock market carries risks, and there are no guarantees of specific returns. It's important to do your research, understand your financial situation, and make informed decisions.

Invest in bonds, bond ETFs, or bond mutual funds

Investing in bonds generally requires a higher upfront time and financial commitment. You will need to understand the basics of bond investing, including the types of bonds available and their features, such as credit quality, maturity date, and yield. This knowledge will enable you to build a well-diversified portfolio of bonds that aligns with your investment goals.

When purchasing individual bonds, you will need a brokerage account. Bond prices are set by individual brokers, and commissions are usually built into the quoted price. Bond trading costs can be a significant drag on returns, especially with low yields.

Bonds typically offer semi-annual interest payments, as defined in the bond prospectus. On the bond maturity date, the principal amount will be returned. However, there is a risk of the issuer defaulting on these payments, although this risk is generally low for investment-grade bonds.

If you don't require the interest payments for income, you will need to decide how to reinvest this cash. Accumulating payments until they meet minimum purchase amounts can be time-consuming and may incur additional commission costs.

Bonds are usually purchased in $1,000 increments, with a minimum order size of around $5,000. A diverse bond portfolio is recommended for effective risk management, which requires a significant amount of funds.

The advantage of buying individual bonds is the ability to tailor your holdings to meet specific requirements, such as the amount and timing of interest payments, credit quality, and maturity date. Additionally, there are no ongoing fees once a bond is purchased.

However, there are also drawbacks to consider, such as high transaction costs and a lack of flexibility. If you're looking for a more accessible option with lower minimum investments, bond mutual funds and exchange-traded funds (ETFs) might be more suitable.

Both bond mutual funds and ETFs pool clients' money to purchase a diversified portfolio of bonds. They allow investors, even those with smaller sums, to gain exposure to a wide range of bonds with just a few purchases. These funds require minimal ongoing maintenance, making them a convenient choice.

Instead of fixed interest payments, funds distribute payments based on the underlying bond holdings, which may include capital gains and the return of capital, in addition to interest. These distributions are typically paid monthly, offering convenience for investors seeking regular income.

Unlike individual bonds, most bond funds don't have a maturity date or a guaranteed return of principal. Instead, they use the cash from new fund purchases and maturing bonds to buy additional bonds.

Bond Mutual Funds

Bond mutual funds are priced in units, and you can easily invest a specific dollar amount. They can be purchased from licensed mutual fund dealers, including banks, credit unions, brokerage accounts, and independent financial advisors. The funds are priced once a day, at the end of the trading day, and orders are fulfilled at the fund's net asset value (NAV).

While sales commissions may apply, there are also no-load mutual funds available, which don't charge a sales commission. Mutual funds may have minimum investment requirements, which can vary from fund to fund, with some requiring a minimum of $1,000 or more.

Bond ETFs

To invest in bond ETFs, you will need a brokerage account, as they trade as shares on the stock market. Bond ETFs can be purchased throughout the trading day at the current market price, and there is usually a commission for each transaction.

It can be more challenging to fully invest a specific dollar amount in a bond ETF compared to a mutual fund, and transaction costs for small purchases might be expensive.

Bond ETFs typically have lower expense ratios than mutual funds, making them more cost-efficient. They are passively managed, aiming to replicate the performance of an underlying bond index, which provides better transparency and more consistent risk characteristics.

Bond ETFs usually don't have a minimum holding period, and there are generally no penalties for selling shortly after purchasing. However, there may be restrictions on withdrawing proceeds, depending on how the ETF is held.

Key Differences

The decision between investing in bond funds or bond ETFs depends on your investment objectives. If you prefer active management, bond mutual funds offer more choices. On the other hand, if you plan to buy and sell frequently, bond ETFs provide greater flexibility.

For long-term investors, both options can meet your needs, but it's essential to research the specific holdings of each fund. If transparency is a priority, bond ETFs allow you to see the holdings within the fund at any given moment.

On the other hand, if you're concerned about finding buyers in the market when you want to sell, a bond fund might be preferable since you can sell your holdings back to the fund issuer.

Final Thoughts

When deciding how to invest in bonds, consider your investment strategy, personal circumstances, and the advantages and disadvantages of each option.

For a basic bond allocation, the convenience, diversification, and low cost of a passive strategy using bond ETFs that track broad investment-grade bond indices are hard to beat. On the other hand, mutual funds offer a broader range of active investing strategies but come with higher costs.

Holding individual bonds is generally only recommended for dedicated investors with significant assets and a specific need to tailor their bond allocation.

Remember, in a low-yield environment, minimizing costs is crucial to maximizing your returns.

Invest in real estate

Real estate is a popular choice for investors seeking returns of 5% or more. However, it's important to note that national returns on housing have barely kept up with cash in the long term, and owning physical real estate can be costly and time-consuming. As such, investing in a Real Estate Investment Trust (REIT) is often a more attractive option.

REITs allow you to invest in real estate without the hands-on work of managing properties. They are companies that own, manage, or finance income-producing properties, and their shares can be bought and traded on stock exchanges.

REIT Returns

REITs have provided returns of around 8.8% per year over the last 15 years, outperforming the returns on physical real estate. Equity REITs delivered five-year compound annual returns of 3.45% for the period ending March 31, 2024.

Online Real Estate Platforms

Another way to invest in real estate is through online platforms such as Fundrise, which allow investors to diversify their portfolios with real estate. These platforms offer low ongoing costs, the potential for supplemental income, and long-term growth. Fundrise, for example, has historically returned between 8.76% and 11.44% since 2014, with a minimum investment of just $500 for the Fundrise Starter Portfolio.

Calculating ROI

When calculating the return on investment (ROI) for real estate, there are two primary methods: the cost method and the out-of-pocket method. The cost method calculates ROI by dividing the investment gain by the property's initial costs. The out-of-pocket method, preferred by many investors due to its higher ROI calculation, takes the current equity of the home divided by its current market value.

Costs to Consider

When investing in physical real estate, it's important to consider the costs involved, such as repairs, painting, landscaping, advertising, appraisal, and real estate agent or broker commissions. There may also be mortgage payments to factor in, and properties often sell for less than their market value, reducing the expected ROI.

REIT Taxation

When selling investment property, any profit made over the adjusted cost basis is taxed as a capital gain. If held for a year or more, it will be taxed at capital gains rates; if held for less than a year, it will be taxed as ordinary income, typically resulting in a higher tax rate.

Rental Income

Rental income from property ownership must be reported on tax filings, and related expenses can be subtracted to arrive at the total income or loss for the year. Losses on rental properties are deductible up to certain limits.

Risks and Rewards

Real estate investing carries risks, and national returns have barely kept up with cash in the long term. However, by carefully choosing investment strategies, such as REITs or online platforms, investors can achieve returns of 5% or more while avoiding the hassles of property management.

Peer-to-peer lending

Peer-to-peer (P2P) lending is a relatively new industry that allows individuals to lend money to or borrow money from other individuals without going through a bank or financial institution. P2P lending platforms connect borrowers directly to individual lenders, with each platform setting its own rates and terms. The process usually involves the investor opening an account on the site and depositing funds to finance loans. Borrowers submit financial profiles and are assigned a risk category that impacts their interest rate.

P2P lending offers investors the potential for higher returns than traditional savings accounts or certificates of deposit (CDs). However, it is essential to note that P2P lending is riskier than keeping your money in a bank. While it offers higher interest rates, it lacks the government guarantees provided by traditional savings accounts.

When considering P2P lending, it is crucial to assess the risks involved. One of the biggest risks is the possibility of borrower default. Research indicates that default rates on P2P lending platforms can be significantly higher than at traditional financial institutions, sometimes exceeding 10%. Additionally, P2P lending platforms may impose fees on borrowers or lenders, or both.

To mitigate these risks, investors should consider diversifying their investments across multiple loans and platforms. Most P2P lending platforms allow investors to fund entire loans or purchase notes in smaller increments, reducing the impact of a single borrower default. It is also important to carefully select a reputable P2P lending platform that complies with relevant regulations and has adequate risk management practices in place.

P2P lending can be a viable option for those seeking higher returns, but it is important to approach it with caution and a thorough understanding of the associated risks.

Invest in annuities

Annuities are a contract between an individual and an insurance company. The investor pays a sum of money, either as a lump sum or in payments over time, and the insurance company promises to pay them a regular stream of income in return. Annuities can be a good option for those looking to make a 5% return on their investments, but it's important to be aware of the different types of annuities and the associated risks and fees.

There are two main types of annuities: immediate and deferred. Immediate annuities are annuitized, meaning they are converted to an income stream for the buyer immediately, while deferred annuities provide income at a future date. Within these categories, there are fixed and variable annuities. Fixed annuities offer a guaranteed minimum rate of return and a fixed series of payments, while variable annuities are based on the performance of underlying investments in mutual funds. Variable annuities, therefore, carry more risk as the annuitant bears the investment risk.

A third type of annuity, a fixed-indexed annuity (FIA), is a hybrid of fixed and variable annuities. FIAs offer the potential for greater returns than a fixed annuity but with less volatility than a variable annuity. They offer a guaranteed principal, meaning you won't lose your initial investment, but they also come with a surrender charge if you cash out early. FIAs are a good option for those who want to diversify their holdings away from the stock market and are willing to accept a longer investment timeline.

When considering an annuity, it's important to remember that annuities are complex and can be difficult to understand. They often come with high fees and commissions, and there may be penalties for early withdrawal. Additionally, annuities may not be a good option for those who need to keep their assets liquid. It's crucial to do your research and understand the different types of annuities, their associated risks and fees, and how they fit your investment goals and risk tolerance.

Overall, annuities can provide a reliable income stream, especially for those planning for retirement, but they may not be suitable for everyone.

Frequently asked questions