People invest with one goal in mind: To earn a good return on their investment. Returns can be determined by the type of investment, the timing and the risks associated with it. That means returns can vary wildly, often making it hard for investors to plan for their financial future. So just what exactly is a good return on investment?
A good return on investment is generally considered to be about 7% per year. This is the barometer that investors often use based off the historical average return of the S&P 500 after adjusting for inflation. Investors use the S&P 500, since it’s the benchmark gauge for the U.S. stock market, which itself is considered to be a snapshot of the U.S. economy.
It’s important for investors to have realistic expectations about what type of return they’ll see. This guide will walk through what a good return on an investment looks like and which assets may potentially help an individual achieve their financial goals.
What is the Historical Average Stock Market Return?
Buying stocks has traditionally been considered a risky but high probability way to earn a good return. Looking at the performance of a market index like the S&P 500 can help lend a sense what kind of return an investor can expect during an average year.
Dating back to the late 1920s, the S&P 500 index has returned, on average, around 10% per year. Adjusted for inflation that’s roughly 7% per year.
Here’s how much a 7% return on investment can earn an individual after 10 years. If an individual starts out by putting in $1,000 into an investment with a 7% average annual return, they would see their money grow to $1,967 after a decade. So almost double the original amount invested.
For financial planning purposes however, investors should keep in mind that that doesn’t mean the stock market will consistently earn them 7% each year. In fact, S&P 500 share prices have swung violently throughout the years. For instance, the benchmark gauge tumbled 38% in 2008, then completely reversed course the following March to end 2009 up 23%. Factors such as economic growth, corporate performance and share valuations can affect stock returns.
Why Your Money Loses Value if You Don’t Invest it
It’s helpful to consider what happens to the value of your money if you simply hang on to cash.
Keeping cash can feel like a safer alternative to investing, so it may seem like a good idea to deposit your money into a savings account–the modern day equivalent of stuffing cash under your mattress. But cash slowly loses value over time due to inflation; that is, the cost of goods and services increases with time, meaning that cash has less purchasing power.
Interest rates are important, too. Putting money in a savings account that earns interest at a rate that is less than the inflation rate, that money loses value every single day as well. This is why, despite the risks, investing money is often considered a better alternative to simply saving it, as it can grow at a faster rate.
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What Is a Good Rate of Return for Various Investments?
Certificates of deposit (CDs) are considered a very safe investment because there’s a fixed rate of return. That means there’s relatively little risk—but investors also agree to tie their money up for a predetermined period of time. CDs are illiquid, in other words.
But generally, the longer money is invested in a CD, the higher the return. Many CDs require a minimum deposit amount, and larger deposits tend to be associated with higher interest rates.
It’s the low-risk nature of CDs that also means that they earn a lower rate of return than other investments, usually only a few percentage points per year. But they can be a good choice for investors with short-term goals who need a relatively safer investment vehicle.
Here are the weekly national rates compiled by the Federal Deposit Insurance Corporation (FDIC) as of Jan. 4, 2021:
|Non-Jumbo Deposits||National Avg. Annual Percentage Yield|
|Jumbo Deposits (≥$100,000)||National Avg. Annual Percentage Yield|
Bonds are considered to be safe investments. Purchasing a bond is basically the same as loaning your money to the bond-issuer, like a government or business.
Here’s how it works: A bond is purchased for a fixed period of time, investors receive interest payments over that time, and when the bond matures, the investor receives their initial investment back.
Generally, investors earn higher interest payments when bond issuers are riskier. An example may be a company that’s struggling to stay in business. But interest payments are lower when the borrower is trustworthy, like the U.S. government. Government bonds, on average, return around 5% annually.
Stocks can be purchased in a number of ways. But the important thing to know is that a stock’s potential return will depend on the specific stock, when it’s purchased, and the risk associated with it. Again, the general idea with stocks is that the riskier the stock, the higher the potential return.
This doesn’t necessarily mean you can put money into the market today and assume you’ll earn a large return on it in the next year. But based on historical precedent, your investment may bear fruit over the long-term. Because the market on average has gone up over time, bringing stock values up with it. As mentioned, the stock market averages a return of roughly 7% per year, adjusted for inflation.
Returns on real estate investing vary widely. It mostly depends on the type of real estate—if you’re purchasing a single house versus a real estate investment trust (REIT), for instance—and where the real estate is located.
As with other investments, it all comes down to risk. The riskier the investment, the higher the chance of greater returns and greater losses. Historically, the rate of return on average properties has been similar to that of the stock market, according to one study. That study found that the return on homes have been between 8.6% and 10% per year .
High or Best Return on Investment Assets
For investors who have a high risk tolerance (they’re willing to take big risks to potentially earn high returns), some investments are better than others. For example, investing in a CD isn’t going to reap a high return on investment. So for those who are looking for higher returns, riskier investments are the way to go.
Remember the Principles of Good Investing
Investors focused on seeing huge returns over the short-term may set themselves up for disappointment. Instead, remembering basic tenets of responsible investing can best prep an investor for long-term success.
First up: diversification. It’s a good idea to invest in a wide variety of assets—stocks, bonds, real estate, etc., and a wide variety of investments within those subgroups. That’s because each type of asset tends to react differently to world events and market forces. Due to that, a diverse portfolio is a less risky portfolio.
Time is another important factor when investing. Investing early may result in larger returns in the long-term. That’s largely because of compound interest, which is when interest is earned on an initial investment, along with the returns already accumulated by that investment. Compound interest can, effectively, supercharge a portfolio.
A diversified portfolio with a long-term outlook is generally considered the best way to maximize returns. So, to get a good return on their investments, investors should keep their goals in mind, invest early, and invest often.
Investing with SoFi Invest®
If you’re looking for investments that will get you a 15% return or more, and pronto, don’t hold your breath. Get-rich-quick schemes are often too good to be true. Instead, learning more about the relationship between risk and reward can help you understand the different returns you stand to earn through various types of investments.
Think about your investment targets, start early, and diversify. SoFi Invest can help you get on the right track to investing responsibly and aiming to achieve your goals. You will have complimentary access to financial advisors that can help you map out your goals and make a personalized plan for achieving them.
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