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GettyA few weeks ago, a reader emailed to ask me where he should invest his money for long-term growth. He had $20,000 in liquid cash to invest and wanted to secure a return of at least 5%.
Well, don’t we all.
Considering the average “high-interest savings account” offers 2% APY at most and CDs aren’t paying significantly more, there are few entirely “safe” options available in today’s economic environment. But, sinceinflation is sitting at around 2% per year, it’s crucial to invest in a way that helps you stay ahead of the curve. If you keep all your excess funds in a regular savings account year after year, you’re actually losing money over the long-term.
While investments are fickle and there are no guarantees anyone can earn a specific return over any length of time, I still wanted to offer up some advice to this guy and anyone who is wondering the same thing. The reality is, there are many ways to invest your money that should return 5% or more if you are willing to invest your cash and leave it alone.
Here are your best options:
Stocks, Mutual Funds, and ETFs
Historical records show that, since its inception in 1928 (and through the end of 2017), the S&P 500 had an average annual return of 10%. While the S&P 500 includes only 500 stocks that are selected by the S&P 500 Index Committee, they are carefully chosen based on past returns, industry, and liquidity.
Investing in individual stocks can absolutely return a yield greater than 5%, but you could also lose your shirt. According to financial advisor Alex Whitehouse of FinHealthy.com, that’s why many investors opt to stash their money into mutual funds or ETFs that help them gain exposure to stocks, bonds, and other securities without putting their eggs in a single basket.
“Most ETFs adhere to an investment theme or track a specific index, like the S&P 500,” he says.
But, how should you go about choosing ETFs that can provide a solid return? Whitehouse says that, when selecting ETFs, it’s important to understand what the ETF owns (its holdings), how much it costs (the expense ratio), and how easy it is to sell (liquidity).
According to investment advisor Don Roork of AssetDynamics Wealth Management, investors of all ages like ETFs because they tend to have low operating costs and improved tax efficiency when compared to actively managed mutual funds. They also “combine the characteristics of a mutual fund with the convenience and trading flexibility of stocks,” he says.
When it comes to investing in ETFs, both advisors note that you should invest your money for the long-term and expect some volatility.
Bonds and Bond Mutual Funds
If you’re hoping to secure a 5% return, individual bonds may not be the ticket. In fact, financial advisor Anthony Montenegro of the Blackmont Groupsays that some bonds can even provide a negative return. So, why would anyone invest in bonds? Most bondholders do so for the income benefit. They also do so in order to avoid some of the dramatic ups and downs of the stock market.
“As a bondholder, you’re in the position of being a lender,” said Montenegro. “You can lend to a corporation like Apple or to a state or municipality like the local public works or school district, and companies pay you from their revenue.”
While bonds are offered in nearly any industry, some investors swear by municipal bonds since they often provide yields of over 5% and usually come with the additional benefit of being tax-free at the federal level. If you’re looking to get into this market, Forbes contributor Brett Owens suggests five different muni funds that have offered a yield greater than 5% — BlackRock MuniYield, Invesco Value Muni Income, Nuveen AMT-Free Municipal Credit Income, Nuveen Quality Muni Income, and Invesco Muni Investment Grade.
You can also invest in high-yield bond portfolios provided you understand they are generally made up of lower quality bonds and thus subject to higher levels of risk. Fidelity Capital & Income Fund (fa*gIX) recently offered a yield of 4.01% with an expense ratio of .67%, for example. That’s not quite 5%, but you’re getting close.
Also check out Vanguard High Yield Corporate Fund Investor Shares (VWEHX), which reported a yield of 8.22% since inception with an expense ratio of just .23%. Finally, BlackRock High Yield Bond Fund (BHYIX) returned investors 7.22% since inception as of October 31, 2018 with an expense ratio of .62%.
Real Estate
Most people believe that real estate is a solid investment choice for returns over 5%, but the national returns on housing have barely kept up with cash in the long-term. Plus, owning and maintaining primary real estate can be expensive, not to mention stressful. Let’s face it; many people have no desire to take on the work of a landlord.
With this in mind, San Diego financial advisor Taylor Schulte says that it can make sense to invest into a Real Estate Investment Trust (REIT) instead of physical real estate. REITs allow you to invest in real estate without the hands-on work required of landlords, and they often do so with better returns over the long haul. As Schulte notes, the Vanguard Real Estate Index Fund (VGSIX) has averaged approximately 8.8% per year over the last 15 years, according to Morningstar.
Also consider the possibility of investing with an online real estate platform such as Fundrise. This platform allows you to diversify your investments with real estate with low ongoing costs and the potential for supplemental income and long-term growth. The platform’s historical returns have ranged from 8.76% to 11.44% since 2014 and the minimum investment starts at just $500 for the Fundrise Starter Portfolio.
Peer to Peer Lending
Another investment option to consider that has the potential for returns over 5% is peer-to-peer lending, and specifically LendingClub. This platform connects borrowers with investors who loan money as if they were the bank. Investors are able to spread their funds across multiple loans in increments of $25 to reduce their risk, and returns can be significantly better than 5% for loans made to riskier borrowers.
LendingClub’s returns have historically come in between 3% and 8% and the platform reports that 99% of portfolios with 100+ notes see positive returns. You an also get started investing with as little as $1,000, which makes this a smart option for established investors and those just getting into the game.
Annuities
Annuities offer another way to save for retirement or the future, and they come in a variety of forms. While annuities are complex and difficult to explain, the most important thing to remember is that are intended to provide you with an ongoing return. When you buy an annuity, you are making a contract with an insurance company that usually promises a payment to you every month.
However, things get tricky when you start talking about the different types of annuities. Where a fixed-rate annuity promises a specific payment every month, a variable annuity offers variable returns that depend on how the underlying investments perform. On the other hand, a fixed-indexed annuity, or FIA, (also called an equity-indexed annuity) is a hybrid between a fixed annuity and a variable annuity. FIAs offermore potential for greater returns than a fixed annuity but less volatility than a variable annuity.
FIAs do offer the benefit of guaranteed principal, meaning you won’t lose your initial investment. But, like all annuities, they come with a surrender charge you’ll need to pay if you cash out your annuity early.
The main selling point of FIAs is that, although they cap your upside when the market is booming, they protect you from losses during years the underlying market reports losses. FIAs also come with income riders that provide investors with additional returns. Keep in mind, however, that most income riders cease when you start receiving distributions from your annuity.
Since individual annuities are as complicated as they are unique, that’s the short version of the story. The bottom line is that fixed indexed annuities can make sense for individuals who have some time before they need to retire and want to diversify some of their holdings away from the stock market. You may also be able to secure a return greater than 5% with an annuity, although you should pay close attention to surrender charges, fees, and your investment timeline.
If you need to keep your assets liquid for any reason, chances are good that annuities are not for you.
The Bottom Line
If you want to make sure your investments are returning at least 5% year after year, it’s smart to consider all the options available to you — even ones you may have never heard of before. On the flip side, it’s important to always remember the golden rule of investing as well — the rule that says that past returns don’t guarantee future results.
Also make sure to ask yourself a few important questions before you invest. Do you need to keep your assets liquid so you can access them in the near future? Or, are you prepared to invest for the long haul?
“When investing any amount of money, it’s important to understand what your goals are,” says Colorado financial advisor Mitchell Bloom of Bloom Financial. However, it’s equally important to know the purpose your money is intended to achieve and how comfortable you are with risk.
“Once you know what your time horizon looks like, you determine what your risk tolerance level is and what kind of investment temperament you feel comfortable with,” says Bloom.
One fact is for certain. The more risk you’re willing to take on, the closer you should get to receiving a return of 5% or more year after year.
