You probably know how to find and buy stocks, but how do bonds work?
Unfortunately, while online stock brokers have made stock investing child’s play over the last 10 years, bond investing has been slow to catch up. In fact, on many online broker sites, online bond platforms don’t even exist. That’s made the world of individual bond investing pretty murky.
You know that a certain percentage of your portfolio should be allocated to bonds (say 40% if you’re in your 40s), but you’ve probably relied on bond mutual funds to do that. And that’s not a bad thing: Bond mutual funds let you own bonds from hundreds of companies with only a small investment. They also have professional managers who can do research into bond investments for you. But bond funds also have one, significant disadvantage to owning individual bonds.
When you buy a bond, you know:
exactly what your interest payments will be,
when you’ll get them, and
when you’ll get your initial investment back as long as the company doesn’t default.
The prices of bond funds, on the other hand, move up and down just like any other mutual fund. If you need your money on a specific date, you’ll have no idea what your mutual fund will be worth. That can make investing in individual bonds preferable for people who need a specific amount of money at a specific time.
For example, you might need to make a $40,000 tuition payment for your college-bound 16-year old in exactly two years. Invest $40,000 in two-year individual bonds, and you’ll have that money back when you need it (as long as the company doesn’t go bankrupt). But invest it in a bond mutual fund, and who knows what it’ll be worth when it’s time to withdraw? Although bond funds typically don’t go down by large percentages, 2008 taught us that that isn’t always the case.
If you are saving for a time-sensitive goal (or need a stream of retirement income) and think you might be a candidate for investing in individual bonds, here’s a primer on how they work.
How Bonds Work
The Treasury department issues Treasury bonds to finance the operation of the federal government. In the same way, companies, states, and cities issue bonds to finance their own operations. Treasury bonds are considered to have no risk of defaulting. So when a company needs to raise money, investors will demand an interest rate that’s a bit higher than what Treasury bonds are offering in order to compensate the investors for the risk that the company goes bankrupt.
Let’s say a company (I’ll use GE just by way of example) needed to raise $100 million to build a new refrigerator factory and wanted to pay the money back in the year 2020. GE would look to the market to determine what interest rate it would need to offer to get investors to lend them the money. If investors demanded 6%, GE would issue $100 million in bonds with a “coupon rate” (the interest rate) of 6% that would be immediately bought by pre-agreed upon banks, funds, and sometimes, individuals. Most company bonds come in $1,000 denominations (the $1,000 is called “par value”). So for each $1,000 bond that the investor owned, he’d get $60 (6% of $1,000) per year, every year until 2020, at which time he’d get his $1,000 back.
In between the time when GE issues the bond and the time when the bond “matures” (i.e. comes due), investors can sell the bonds on the secondary market. But just like a stock price, the bond price will fluctuate.
Let’s say GE issued that bond three years ago, and since then, the company’s prospects of surviving until 2020, while still good, are decidedly gloomier. If an investor sells his bond today, the buyer will want an interest rate higher than the original 6% to compensate for the extra risk. GE will still pay the new investor $60 per year. So instead, the investor will want to buy the bond for less than par value.
If the new investor buys the bond for $900, while the coupon rate will still be 6%, the yield will be higher — both because he only has to invest $900 to get $60 a year and because he’ll get back $1,000 when the bond matures.
The same thing can happen in reverse, and sometimes investors will buy bonds for above par value, reducing the yield.
Related >> Beginners guide to investing
The Trouble with Buying Bonds
Unfortunately, small investors have a lot more trouble buying individual bonds than they do buying individual stocks. For one, there are simply a lot more bonds than there are stocks. Think about it: A single company could have a dozen times when it wanted to borrow money (meaning it’d have 12 different bonds on the market versus one common stock).
But more important, the actual process of buying a bond isn’t easy. Stock brokers most often act as intermediaries between buyers and sellers. Bond brokers, on the other hand, are often the actual investors who will buy or sell you the bond. So as an individual bond investor, unless you have multiple brokers, your investments will be limited to the bonds that your broker has in his inventory.
Bond commissions can also be confusing. Whereas you might pay a flat commission to buy and sell stocks, the commission on bonds is built into the bond’s price. So, for example, if your broker originally bought the bond for $1,000 and it yielded 7%, he might sell it to you for $1,100, in which case it would only yield 6.4% for you ($70 divided by $1,100). The spread between his buying price and his selling price is effectively his commission. Big investors, who can sink millions of dollars into a bond at once, also tend to get better prices than small investors, who might only be able to buy $10,000 worth of a bond.
For the longest time, small investors couldn’t see how much other investors were buying and selling bonds for, meaning that their broker could seriously rip them off. Fortunately, SIFMA has put together a website where you can look up the prices of recent bond transactions.
When the Hassle is Worth It
All those caveats probably beg the question: Why bother?
For investors just starting out or who have a small amount of their portfolios to devote to bonds (less than $100,000), the answer is, “Don’t!” Just stick with a no-load, low expense mutual fund until you’ve amassed more.
But investors who do meet that criteria can use bonds to create a predictable income stream — something that no bond fund can guarantee.
If you ask any financial advisor when to start saving for retirement, their answer would likely be simple: Now.
It’s not always easy to prioritize investing for retirement. If you’re in your 20s or 30s, you might have student loans or other goals that seem more “immediate,” such as a down payment on a house or your child’s tuition. But starting early is important because it can allow you to save much more. In fact, setting aside a little every year starting in your 20s could mean an additional hundreds of thousands of dollars of accumulated investment earnings by retirement age.
No matter what age you are, putting away money for the future is a good idea. Read on to learn more about when to start saving for retirement and how to do it.
The #1 Reason to Start Early: Compound Interest
When should you start saving for retirement? In your 20s, if possible. That’s because if you start saving early, you could reap the benefits of compound interest.
Here’s how compound interest works and why it can be so valuable: The money in a savings account, money market account, or CD (certificate of deposit) earns interest. That interest is added to the balance or principle in the account, and then interest is earned on the new higher amount.
Depending on the type of account you have, interest might accrue daily, weekly, monthly, quarterly, twice a year, or annually. The more frequently interest compounds on your savings, the greater the benefit for you.
And the sooner you start saving, the more time compound interest has to do its work.
Saving Early vs Saving Later
To understand the power of compound interest, consider this:
If you start investing $6,000 a year at age 25, by the time you reach age 67, you’d have a total of 1,055,703.27. However, if you waited until age 35 to start investing the same amount, and got the same annual return, you’d have $545,338.67.
Age
Annual Return
Savings
25
6%
$1,055,703.27
35
6%
$545,338.67
As you can see, starting in your 20s means you’d save almost half a million dollars more than waiting until your 30s.
Starting Retirement Savings During Different Life Stages
Retirement is often considered the single biggest expense in many peoples’ lives. Think about it: You may be living for 20 or more years with no active income.
Plus, while your parents or grandparents likely had a pension plan that kicked off right at the age of 65, that may not be the case for many workers in younger generations. Instead, the 401(k) model of retirement that’s more common these days requires employees to do their own saving.
As you get started on your savings journey, do a quick assessment of your current financial situation and goals. Be sure to factor in such considerations as:
• Age you are now
• Age you’d like to retire
• Your income
• Your expenses
• Where you’d like to live after retirement (location and type of home)
• The kind of lifestyle you envision in retirement (hobbies, travel, etc.)
To see where you’re heading with your savings you could use a retirement savings calculator. But here are more basics on how to get started on your retirement savings strategy, at any age.
Starting in Your 20s
Starting to save for retirement in your 20s is something you’ll later be thanking yourself for.
As discussed, the earlier you start investing, the better off you’re likely to be. No matter how much or little you start with, having a longer time horizon till retirement means you’ll be able to handle the typical ups and downs of the markets.
Plus, the sooner you start saving, the more time you’ll be able to benefit from compound interest, as noted.
Start by setting a goal: At what age would you like to retire? Based on current life expectancy, how many years do you expect to be retired? What do you imagine your retirement lifestyle will look like, and what might that cost?
Then, create a budget, if you haven’t already. Document your income, expenses, and debt. Once you do that, determine how much you can save for retirement, and start saving that amount right now.
Starting in Your 30s
If your 20s have come and gone and you haven’t started investing in your retirement, your 30s is the next-best time to start. While there may be other expenses competing for your budget right now — saving for a house, planning for kids or their college educations — the truth remains that the sooner you start retirement savings, the more time they’ll have to grow.
If you’re employed full-time, one easy way to start is to open an employer-sponsored retirement savings plan, like a 401(k). We’ll get into details on that below, but one benefit to note is that your savings will come out of your paycheck each month before you get taxed on that money. Not only does this automate retirement savings, but it means after a while you won’t even miss that part of your paycheck that you never really “had” to begin with. (And yes, Future You will thank you.)
Starting in Your 40s
When it comes to how much you should have saved for retirement by 40, one general guideline is to have the equivalent of your two to three times your annual salary saved in retirement money.
Once you have high-interest debt (like debt from credit cards) paid off, and have a good chunk of emergency savings set aside, take a good look at your monthly budget and figure out how to reallocate some money to start building a retirement savings fund.
Not only will regular contributions get you on a good path to savings, but one-off sources of money (from a bonus, an inheritance, or the sale of a car or other big-ticket item) are another way to help catch up on retirement savings faster.
Starting in Your 50s
In your 50s, a good ballpark goal is to have six times your annual salary in your retirement savings by the end of the decade. But don’t panic if you’re not there yet — there are a few ways you can catch up.
Specifically, the government allows individuals over age 50 to make “catch-up contributions” to 401(k), traditional IRA, and Roth IRA plans. That’s an additional $7,500 in 401(k) savings, and an additional $1,000 in IRA savings for 2023.
The opportunity is there, but only you can manage your budget to make it happen. Once you’ve earmarked regular contributions to a retirement savings account, make sure to review your asset allocation on your own or with a professional. A general rule of thumb is, the closer you get to retirement age, the larger the ratio of less risky investments (like bonds or bond funds) to more volatile ones (like stocks, mutual funds, and ETFs) you should have.
Starting in Your 60s
It’s never too late to start investing, especially if you’re still working and can contribute to an employer-sponsored retirement plan that may have matching contributions. If you’re contributing to a 401(k), or a Roth or traditional IRA, don’t forget about catch-up contributions (see the information above).
In general, when you’re this close to retirement it makes sense for your investments to be largely made up of bonds, cash, or cash equivalents. Having more fixed-income securities in your portfolio helps lower the odds of suffering losses as you get closer to your target retirement date.
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Types of Retirement Savings Vehicles
Here are the most common types of retirement accounts and who can use them. This isn’t a comprehensive list of retirement accounts, so it might be a good idea to discuss retirement planning with a financial planner or accountant.
401(k)
A 401(k) is a workplace retirement account offered by employers. Typically, you contribute a portion of your paycheck, pre-tax.
One of the benefits of using your workplace’s retirement plan is that your company may offer a “match.” A match is when your company contributes to your account when you do. The median maximum employer match is 3%, according to the most recent data from the Bureau of Labor Statistics.
At the very least, you might want to contribute to take advantage of your match since it’s essentially free money. You don’t have to stop there though — in 2023, the IRS maximum 401(k) contribution limit is $22,500, with an additional $7,500 catch-up contribution allowed for those older than 50.
These accounts are tax-deferred, meaning you pay income taxes when withdrawing the savings in retirement. One of the many benefits of using a 401(k) or similar workplace plan is that it lowers your taxable income. For instance, if you’re making $85,000 and you’re contributing $10,000 annually to your 401(k), then you’ll only be taxed on $75,000 of that income.
One of the downsides to a 401(k) is that withdrawing these funds early could trigger a 10% tax penalty in addition to income taxes. Other workplace plans include SIMPLE IRAs, 403(b)s, 457 plans, and Thrift Savings Plans. If you’re self-employed, you could consider opening a Solo 401(k) or SEP IRA.
Traditional IRAs
An Individual Retirement Account or IRA is another account you may use to save for retirement. An IRA is an investment account that is not tied to your workplace. That makes a traditional IRA an option for those that are self-employed or freelancers.
Like a 401(k), a traditional IRA is tax-deferred and provides a place for your investments to grow free from capital gains tax. Because the money is taxed upon withdrawal at retirement, a traditional IRA also carries a penalty for early withdrawal.
Traditional IRA accounts have a much lower contribution limit than 401(k) plans: $6,500 in 2023, if you’re younger than 50. Those 50 and older can contribute $7,500 annually.
Recommended: What is an IRA?
Roth IRAs
Like a traditional IRA, a Roth IRA is an account that you can open on your own, separate from your workplace. Both individuals covered by workplace retirement plans and those who are self-employed can contribute to a Roth IRA, although there are income limitations.
It’s possible to contribute up to $6,500 into a Roth IRA each year, although exactly how much is tied to your income. In 2023, a single person earning under $138,000 can contribute at least some money to a Roth IRA. For married couples filing jointly, the modified adjusted gross income must be under $218,000 in order to contribute some money to a Roth IRA. As income goes down, max contributions increase until they hit the $6,500 cap.
Unlike a traditional IRA and a 401(k), which are tax-deferred, a Roth IRA is tax-exempt. You pay income taxes on the money that is contributed to the account, but you can withdraw money tax-free in retirement.
Like all retirement accounts, Roth IRAs are free of capital gains taxes, or the levies charged on money you earn from profitable investments.
Self-Employed Options
If you’re self-employed, you can save for retirement with a traditional or Roth IRA. Other investment options for those who are self-employed include:
Solo 401(k)
A Solo 401(k) is basically a 401(k) plan for self-employed individuals or business owners with no employees. The contributions made to the plan are tax-deductible, and the contribution limit is $22,500 in 2023, or 100% of your earned income, whichever is lower, plus “employer” contributions of up to 25% of your compensation from the business. For 2023, the total cannot exceed $66,000. (However, people age 50 and over are allowed to contribute an additional $7,500.)
SEP Plans (Simplified Employee Pension)
These are retirement accounts established by a small business owner or self-employed person for themselves. The contributions you make to the plan will reduce your taxable income. The money in the plan will grow tax-deferred and you will pay taxes on withdrawals in retirement. For 2023, the contribution limit is $66,000 or 25% of your earned income.
High-Yield Savings Account
A high-yield savings account, also known as a high-interest savings account, typically allows you to earn several percentage points more in interest than a standard savings account. Some high-interest savings accounts have an APY (annual percentage yield) of more than 4%.
And thanks to the power of compound interest, a high-yield savings account could help your savings grow even more.
Considerations When Investing for Retirement
Once money has been contributed to a retirement account, it’s time to invest that money. To say “saving for retirement” is a bit misleading — really, it can be considered to be “investing for retirement.” And you can invest within any of the above mentioned accounts.
Here are some considerations to keep in mind when investing for retirement:
• Your risk tolerance and goals: If you have a workplace plan, you may be given a list of mutual funds to choose from. To choose a fund, you might want to determine whether the underlying investment is appropriate given your goals and risk tolerance. The categories are usually stocks, bonds, domestic equities, foreign equities, or emerging-market stocks and bonds.
• Fees. You may also want to consider the management fees of the fund, called the expense ratio. This is usually expressed as a percentage which is subtracted from the amount invested each year.
For those without a workplace plan, you might want to open a retirement account, fund the account with cash, and then invest the money. Investors can do this by signing up for a traditional brokerage account if they want to pick and choose investments themselves. They might also consider a robo-advisor, or computer-generated investing services.
Recommended: Are Robo-Advisors Worth It?
The Takeaway
Investing in retirement and wealth accounts is a great way to jump-start saving and investing for your golden years, whether you invest $10,000 or just $100 to get started.
The first step is to open an account or use the one that’s already open. You could also increase your contribution. If you’re opening an account, you may want to consider one without fees, to help maximize your bottom line.
Ready to invest for your retirement? It’s easy to get started when you open a traditional or Roth IRA with SoFi. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).
Easily manage your retirement savings with a SoFi IRA.
FAQ
What is the ideal age to start saving for retirement?
Ideally, you should start saving for retirement in your 20s, if possible. By getting started early, you could reap the benefits of compound interest. That’s when money in savings accounts earns interest, that interest is added to the principal amount in the account, and then interest is earned on the new higher amount.
Starting to save for retirement in your 20s can allow you to save much more. In fact, setting aside a little every year starting in your 20s could mean an additional hundreds of thousands of dollars of accumulated investment earnings by retirement age.
That said, if you are older than your 20s, it’s not too late to start saving for retirement. The important thing is to get started, no matter what your age.
Is 20 years enough to save for retirement?
It’s never too late to start investing for retirement. If you’re just starting in your 40s, consider contributing to an employer-sponsored plan if you can, so that you can take advantage of any employer matching contributions. In addition to regular bi-weekly or monthly contributions, make every effort to deposit any “windfall” lump sums (like a bonus, inheritance, or proceeds from the sale of a car or house) into a retirement savings vehicle in an effort to catch up faster.
Is 25 too late to start saving for retirement?
It’s not too late to start saving for retirement at 25. Take a look at your budget and determine the max you can contribute on a regular basis — whether through an employer-sponsored plan, an IRA, or a combination of them. Then start making contributions, and consider them as non-negotiable as rent, mortgage, or a utility bill.
Is 30 too old to start investing?
No age is too old to start investing for retirement, because the best time to start is today. The sooner you start investing, the more advantage you can take of compound interest, and potentially employer matching contributions if you open an employer-sponsored retirement plan.
Should I prioritize paying off debt over saving for retirement?
Whether you should prioritize paying off debt over saving for retirement depends on your personal situation and the type of debt you have. If your debt is the high-interest kind, such as credit card debt, for instance, it could make sense to pay off that debt first because the high interest is costing you extra money. The less you owe, the more you’ll be able to put into retirement savings.
And consider this: You may be able to pay off your debt and simultaneously. For instance, if your employer offers a 401(k) with a match, enroll in the plan and contribute enough so that the employer match kicks in. Otherwise, you are essentially forfeiting free money. At the same time, put a dedicated amount each week or month to repaying your debt so that you continue to chip away at it. That way you will be reducing your debt and working toward saving for your retirement.
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Like many other investors, J.D. and I are fans of taking the slow, sure path to wealth. We invest much of our money in index funds. An index fund is a low-maintenance, low-cost mutual fund designed to follow the price fluctuations of a broader index, such as the S&P 500 or the Wilshire 5000. They’re boring investments, but they work. (If you’re investing for the excitement, you’re doing it for the wrong reason.)
Because of their low costs, index funds have been shown over and over to dominate the majority of their competition. Yet many investors shy away from index funds with the reasoning that “the stock market is too risky for me.”
People seem to think that index funds are simply mutual funds that track the U.S. stock market. And that’s not particularly surprising given that S&P 500 index funds are:
the largest index funds,
the index funds mentioned most frequently by the media, and
the index funds most likely to show up as an choice in your 401(k).
But there are all kinds of index funds aside from those that track the S&P 500. There are bond index funds, real estate index funds, commodities index funds, international stock index funds, and so on.
In other words, you can create a thoroughly diversified portfolio using nothing but index funds.
In fact, I’d suggest doing exactly that. By created a diversified, all-index fund portfolio, you’ll achieve a list of benefits relative to other types of portfolios.
Lower Risk Which sounds safer: Having the stock portion of your portfolio invested in 10 different companies, or having the stock portion of your portfolio invested in several thousand companies from more than 10 different countries? I know some people disagree, but to me it’s a no-brainer.
By constructing your portfolio from index funds, you’ll achieve far greater diversification (and therefore be exposed to less risk) than you would if you constructed your portfolio from individual stocks and bonds.
Lower Costs Both common sense and historical data tell us that one of the best ways to improve investment returns is to reduce costs. Conveniently, index funds carry significantly lower costs than actively managed mutual funds. For example:
Vanguard’s Total Bond Market Index Fund has an expense ratio of 0.22%. That’s less than one-fourth of the average expense ratio among bond funds (1.04%, according to Morningstar’s Fund Screener tool).
Vanguard’s REIT Index Fund has an expense ratio of 0.26%, or less than one-fifth that of the average real estate fund (1.45%).
It’s quite possible that you could cut your total costs by 1% or more. And while 1% per year may not sound like much, it can really add up over an extended period.
Lower Taxes Index funds have much lower portfolio turnover than other mutual funds. (That is, they buy and sell investments within their portfolios far less frequently than actively managed funds do.) This makes them more tax efficient than other mutual funds for two reasons:
The capital gains they distribute are primarily long-term in nature (and thereby taxed at a lower rate than short-term capital gains), and
Their capital gains distributions are minimized, meaning that you get to defer a significant portion of taxes until you sell the fund.
Added Bonus: You’ll understand what you own. With an actively managed mutual fund, you never know exactly what the fund manager is investing in. With index funds, it’s all out in the open.
Do you (like both me and J.D.) have a portfolio made up primarily of index funds? If not, why? Is there a particular concern that’s holding you back?
Bonds may seem boring, but you need to know about them!
It was more than a year ago that Wharton business school professor Jeremy Siegel, author of the classic Stocks for the Long Run, co-wrote an op-ed in The Wall Street Journal called “The Great American Bond Bubble.” Siegel and Jeremy Schwartz caused a stir with their claim that the “possibility of substantial capital losses on bonds looms large.” If 10-year interest rates rose from 2.8% to 3.15%, bondholders would lose capital equal to the current yield. That’s because as rates rise, the value of existing bonds fall.
In an interview with IndexUniverse.com from last July, Siegel brought up the article, saying, “That happened to be a nice call.” Well, not really. Yes, stocks have outperformed bonds since the article’s publication in August 2010, but the average bond fund still made money. As for this year so far, stocks are down and bonds are up.
Yes, with rates so low, there are risks to owning bonds. But I find that there’s a good deal of misunderstanding out there. So before you sell all your bonds (if you own any), let’s take a look at how the market works and what could happen if rates rise.
Note: And before we even do that, it might be useful to review how bonds work or read about the basics of bonds. For many investors, bonds are a mystery. It doesn’t have to be that way!
Price Doesn’t Necessarily Matter First and foremost, remember that a bond is not like a stock. Over the long term, the returns from bonds do not come from rising and falling prices.
For instance, consider a share of Coca-Cola stock, which traded for a split-adjusted $13.56 in January 1991. More than 20 years later, it trades for $67.04. Stock investors expect this type of price growth.
However, let’s say you bought a $1,000 20-year Coca-Cola bond in January 1991. How much was it worth when it matured in January 2011? Just $1,000 — the amount of principal that Coke returned to you. From a price perspective, you didn’t make any money for two decades. But you did rake in some cash by earning interest and reinvesting that interest; in other words, interest on interest. That’s known as compounding, and it’s crucial to understanding the long-term returns from bonds.
Compounding returns make your money grow — like a group of guinea pigs!
Compounding Matters Consider an example based on an illustration from The Bond Book by Annette Thau. Let’s say you invest $10,000 in 30-year bonds with a 7% coupon (that’s the interest rate on a bond when it is issued). Like most bonds, these pay interest semi-annually, so you receive $350 every six months. You reinvest that money in an investment that also earns 7%.
During the first year, you receive two payments for a total of $700. However, reinvesting those payments gets you an additional $12.25. No big deal, right? Well, look at how interest on interest compounds over time:
Time
Number of Payments
Coupon Interest (Cumulative)
Interest on Interest (Cumulative)
Total Interest (Cumulative)
Year 1
2
$700
$12.25
$712.25
Year 5
10
$3,500
$605.99
$4,105.99
Year 10
20
$7,000
$2,897.89
$9,897.89
Year 20
40
$14,000
$15,592.60
$29,592.60
Year 30
60
$21,000
$47,780.91
$68,780.91
As you can see, the interest on interest of $47,780.91 is more than twice the amount of interest you actually received from the bond ($21,000) and almost five times more than your original investment ($10,000). This is all because you used the interest payments from your bonds to buy more bonds, which also paid you interest that allowed you to buy more bonds, and so on.
Now, you may be saying to yourself, “Sounds good, but that $350 I received as the first coupon — or even the $700 in the first year — wouldn’t have been enough to buy another bond, since most trade around $1,000. Plus, buying a single bond has relatively high transaction costs.” You’re right (goodness, you’re smart!). This demonstrates one of the values of bond mutual funds: The interest — even small amounts — is automatically and easily reinvested, commission-free. Furthermore, while most bonds pay interest semi-annually, most bond funds pay interest quarterly or monthly, which allows for faster and more efficient reinvestment.
As the table demonstrates, the dramatic payoff from compounding comes after two or three decades. But you can still see the benefits over shorter time frames. Consider someone who invested $10,000 in the Vanguard Total Bond Market Index Fund on Dec. 31, 1999. According to numbers provided to me by Vanguard, $10,000 would have purchased 1,046 shares of the fund.
Fast-forward to Dec. 31, 2010. Thanks to interest reinvestment, this person now owns 1,704 shares of the fund. The $10,000 investment has grown to $18,061 as of Dec. 31, 2010, mostly because the investor owns 658 more shares. Plus, even though rates have fallen since 1999, the total amount of interest this investor receives is more today than it was back then, because she has 63% more shares making distributions.
Patience is a virtue — in the long run, bonds pay off
What If Rates Go Up? So far, we’ve looked at a scenario in which rates stay the same and a scenario in which they drop. Now, let’s look at what might happen if and when rates go up — in fact, let’s assume they skyrocket by four percentage points. In a research report [PDF] published in 2010, Vanguard did just that, estimating the future returns on intermediate-term bonds if rates were to increase from 2.9% t o 6.9% — a 140% increase, steeper than any the U.S. has yet seen. Here are their projections:
Today
+1 Year
+2 Years
+3 Years
+4 Years
+5 Years
Yield (%)
2.9
6.9
6.9
6.9
6.9
6.9
Price change (%)
0
(18.4)
0
0
0
0
Total return (%)
2.9
(13.5)
6.9
6.9
6.9
6.9
Cumulative total return (%)
—
(13.5)
(7.5)
(1.2)
5.7
13
Annualized total return (%)
—
(13.5)
(3.8)
(0.4)
1.4
2.5
As you can see, the price of the bonds would drop an estimated 18.4% in the year rates begin to rise, but the decline would be offset by the interest payments, so the total one-year loss would be just 13.5%. Historically, the overall bond market has never suffered such a decline; the actual worst 12-month return for the Barclay’s Capital U.S. Aggregate Bond Index was a loss of 9.2% from April 1979 to March 1980.
Importantly, bonds now have a much higher yield, which helps the investment recover. As stated in the Vanguard report, “[T]wo years following the hypothetically worst bond market return ever, the diversified bond investor would be close to breaking even, simply by reinvesting interest distributions.”
Still, the 2.5% annualized return is lower than the 2.9% a year the bonds would have earned had rates not changed. It would be just grand if we could time the bond market, getting out before rates rise and getting back in when rates are about to fall. But that’s pretty hard to do. As legendary mutual fund manager Peter Lynch wrote, “Nobody can predict interest rates, the future direction of the economy, or the stock market.”
Also, had the folks at Vanguard extended their analysis beyond five years, the annualized return would have exceeded 2.9% as several years of higher interest payments made up for the initial decline. In other words, higher interest rates eventually lead to higher returns. This is demonstrated in a table based on research from fund company Pimco:
Change in Interest Rates
Return After 1 Year
Return After 3 Years
Return After 5 Years
Return After 7 Years
Return After 10 Years
Return After 30 Years
+2%
-1.7%
3.8%
4.8%
5.2%
5.5%
6.2%
+1%
1.6%
4.3%
4.7%
4.8%
5.0%
5.2%
No change
4.3%
4.3%
4.3%
4.3%
4.3%
4.3%
-1%
8.3%
5.2%
4.4%
4.1%
3.9%
3.4%
In this analysis, the starting yield on the bonds was 4.3%, and future returns are estimated based on a few scenarios. The scenario that produces the highest longer-term returns is the one with the highest spike in interest rates. As you know by now, this is partially thanks to the reinvestment of interest. But there’s one last point we must understand about how bonds perform after interest rates rise.
Bonds can help safeguard your portfolio
Rising Prices, Guaranteed Let’s return to how bonds differ from stocks. When the stock market is down, the right move may be to buy more shares in the hope that the market will eventually recover. But the stock investor doesn’t know when the recovery will occur. What will the stock market be worth five years after, say, a 10% drop? Who knows?
However, when an existing bond drops because of a rise in interest rates, the belief that its prices will rise again is more than a hope; it’s a certainty, as long as the issuer doesn’t default. For example, let’s say one of the bonds in your bond fund drops from $1,000 to $900 because of a rise in rates. Unless that bond defaults, it will definitely recoup that loss, gradually growing back to $1,000 as it nears maturity. Meanwhile, you’re reinvesting the distributions from your bond fund to buy more of these lower-priced, higher-yielding bonds.
The Bottom Line on Bonds I don’t mean to downplay the risk of bonds right now. There is a real possibility — some say a likelihood — that rates will rise and the values of existing bonds will drop. And I agree with Siegel and Schwartz that, for the long-term investor, high-quality, dividend-paying stocks are a better bet than bonds at current rates.
But my concern is that all this talk of a “bond bubble” is scaring people into thinking that declines of 30% are on the way, causing investors to flee to non-yielding cash or buy stocks when they shouldn’t be taking on that much risk.
For money you absolutely need in the next three to five years, stick to short-term bond funds or a ladder of CDs. But for longer-term investments that aim to reduce the risk and volatility of your stock portfolio, a low-cost, high-quality, intermediate-term bond fund is still a good option.
In general, bonds protection against stormy weather in the stock market
BlackRock Inc. Chief Executive Officer Larry Fink said artificial intelligence has tremendous potential to boost productivity and may ultimately be the technology that can tamp down inflation.
The collapse of productivity has been a key issue within global economies and a major “reason why we have such sticky inflation,” he said Wednesday at the BlackRock Investor Day. Fink said AI “may be the technology that can bring down the inflation.”
The CEO of the world’s largest asset manager said AI could have “some very large outcomes for long-term investing” and could also transform margins across sectors. With AI, Fink said, BlackRock will have the “same healthy paranoia, the same healthy enthusiasm,” that it brings to its other businesses.
Fink and other senior executives laid out a vision for BlackRock’s growth as a one-stop shop for investors that provides tech, data, analytics, funds and financial markets advice to clients.
The firm aims to double its private markets revenue over the next five years to about $2 billion from $1 billion in 2022. Revenue from private markets — which includes infrastructure, private equity, real estate and private credit — had already more than doubled since 2018.
Read More: BlackRock Seeking to Become One-Stop Shop for Private Assets
Fink, 70, also told investors he doesn’t anticipate retiring in the near future.
“I’m not planning to leave BlackRock any time soon,” he said, “but BlackRock’s board and I have no higher priority than developing the next generation of leaders.”
BlackRock’s size and influence have grown over the past decade, with investors pouring money into the firm’s index, exchange-traded and other funds. The company managed $9.1 trillion in client assets at the end of March, and had net inflows of $110 billion in the first quarter as investors put money into the firm’s cash-management and bond funds.
How do you choose a mutual fund? But first, is it time for you to start investing? You may be asking the question – should invest while you’re still in debt? Or, perhaps – what is enough emergency savings before investing? These can be challenging questions to answer, but in general, you should invest as early as possible in life to maximize growth, especially if you can get a 401(k) match by your employer.
Priorities Before Investments
However, if you’re in debt and have minimal or no savings, you’ll want to work on those goals as a top priority. Only invest up to the point of getting an employer match if you can still make forward progress on these top priorities. Certainly you want to build emergency savings and get out of debt as quickly as possible to avoid missing out on investing and the magic of compounding.
Mutual Fund Investing
Now, assuming it’s the right time for you to invest, let’s talk about investing in mutual funds. Dave Ramsey always suggests buying a good growth stock mutual fund. But, is this advice enough for everyone?
Obviously, you can buy indivdual mutual funds, but most commonly mutual funds are offered as investment choices in your company 401(k) or IRAs. Some people prefer to using a broker or advisor to help them choose mutual funds. However, some more daring individuals who like some excitement prefer to choose funds on their own. Actually, these people, who invest well, invest the time to consider many aspects to mutual fund investing.
If you choose to invest on your own you’re going to be faced with a lot to consider. So, the rest of this post serves to give you a brief overview of some considerations and hopefully, spark your interest in learning more before making what can be a costly investment decision.
Note: I’m not a broker or financial advisor, so I’m far from an expert when it comes to recommending investments or all the ins and outs. These considerations are some things I’ve learned along the way and have found in reading articles, so definitely conduct your own research.
What to Consider in Choosing a Mutual Fund
Your Goals and Risk Tolerance
The first thing you’ll want to do is to evaluate your investment goals. Ask yourself the following questions: How old are you and how long do you have until you retire? What is your risk tolerance? What is your investment objective – growth, income, preservation of assets?
Answers to these questions will help you decide on the right type of fund(s). Certainly, some funds offer more rewards, but have greater risk. Generally, speaking there are equity funds, bond funds and money market funds.
Money market funds are generally safe places to put your money, but don’t offer great rewards. However, as a short-term investment instrument, they will typically offer better returns than a savings account.
If you’re looking for income you might consider bond funds. Bond funds invest primarily in government or corporate debt. However, they aren’t without risk. If interest rates go up bond funds decline in value.
Equity funds invest in corporate stocks with an objective of longer term growth of your investment. You can understand there are many different types of companies, so there are also many types of equity funds based on investment styles and size.
Expenses
Mutual fund expenses may include management fees, administrative fees, distribution fees and other expenses. Obviously, it’s important to make sure you find funds that keep these costs to a minimum as they can eat into your return over time. Make sure you check the fund prospectus to learn about the fees. According to Motley Fool –
Index funds typically charge about 0.20% of the assets, and actively managed funds currently average about 1.5% per year. The average fee, by the way, has actually been climbing in recent years. Any fund that has fees above 1% per year can be expected to under perform the total returns offered by an index fund.
Sales charges
A sales charge, or mostly commonly known as sales load is a commission you pay to a broker when the broker recommends a mutual fund. You can pay a front-end sales load (when you purchase the fund) or a back-end sales load when you redeem the shares. You may have heard paying sales charges isn’t worth it. I’ve always been given this advice and according to Motley Fool this advice is accurate.
You should be aware that there is no real difference historically between the performance of load funds and no-load funds in terms of year-to-year performance.
As in the past, I’ll continue to avoid funds with a sales loads. Just be careful as I’ve found the whole process of understanding sales charges (and expenses) can be quite confusing.
Turnover
Just as you’ve probably heard it’s not wise to buy and sell your investments all the time, you don’t want your fund doing the same. You’ll want to know how much your fund is turning over investments each year. Look for funds with a lower turnover percentage. 100% means they sell everything and buy new stocks each year. More turnover usually means more expenses. Just like it costs you to buy and sell, it costs the fund too.
Management
Management of the fund is important. For example, you don’t want a fund manager who is inexperienced. Perhaps a brokerage company is trying to test a new fund manager and review performance. But, why would you want to let them conduct that experiment with your investments? You wouldn’t, so read up about the management, their history and how long they’ve been with the fund. Look at how long they’ve been managing the current fund and if they’re fairly new you may want to consider another investment.
Performance and Volatility
Basically, volatility is when your investment moves up and down. For some mutual funds it can be a roller coaster ride which may not be so much fun for you. It’s common for your investment to fluctuate, but at the same time, according to Forbes, you don’t want to see large swings. You can avoid volatility by diversifying with different types of mutual funds. For individual funds, take a look at the best years and worst years and decide if there is too much fluctuation for your liking. Obviously, a long-term perspective on investing may help lessen the emotions of volatility.
Don’t get hung up on looking at great returns over just a few years. They investments can be the next big thing, but not do so well after 5 years or more. Rather, I like looking at a funds performance over at least a 5 year span of time. 10 years is even better. You can also compare the fund to market indexes such as the S&P 500. Ideally, you want to perform at or better than such an index.
Study
Finally, if you want to do your own investing, you need to study. Read the prospectuses. If you’re going to choose a fund, you need to spend the time to know the information discussed in this post as a good starting point. Sure, mutual fund investing in itself is diversifying which helps reduce risk, but don’t fool yourself. Mutual fund investing still involves a lot of risk, so the best bet is to invest in different types of funds to stay well diversified and get a steady return on your money.
What do you think about these tips? Are there any you would add to the list?
You’ve been busting your butt, scraping by, trying to save as much as you can into your retirement accounts, but you never feel like it’s enough.
Money is such a taboo subject that most of your co-workers don’t feel like opening up about how much they have saved (or how much they wish they would have), so it’s tough trying to gauge if you’re even in the ballpark of actually retiring one day.
How do you know how you compare to the average retirement savings figure?
According to a recent survey, 51% of workers over the age of 55 have less than $50,000 saved for retirement. And 39% in that same age group have less than $25,000 in retirement savings. Those are frightening numbers if you consider that those people are very close to the typical age of retirement.
Guide to Retirement Savings
The Employee Benefit Research Institute regularly publishes the average retirement savings of different age groups. Recent findings look like this:
Workers under age 35 barely have $6,000 in savings.
Those between the ages of 35 and 44 have roughly $22,500.
Workers ages 45-54 have saved just under $44,000.
Baby boomers, those aged 55-64, have approximately $65,000 in savings.
Those 65 and over have saved $56,000.
If you actually do the calculations, you will discover that these are scary findings indeed.
Half of all Baby Boomers don’t have enough money saved for retirement just to cover basic needs.
What can you do? First, you need to figure out how much money you will need for your retirement. There are many variables that must be considered including:
At what age do you plan to retire? If you are thinking about leaving the workforce early, you will need more money for retirement as you will be retired longer. Consider how long you will be retired. Not a thrilling thing to ponder, but crucial nonetheless.
How much of your current income do you feel you will need on a yearly basis once you retire? A common percentage range is 65-75%. Be sure to think about whether you will want to travel or relocate. Some people would like to have money to leave to their children. If this is true in your case, you might want to work with a percentage closer to 100.
Don’t forget inflation. Figure about a 3% per year inflation rate. Say you make $100,000 yearly and have decided that you require 65% of that per year during retirement. It is not sufficient to multiply $100,000 by 65% and come up with a neat amount of $65,000. Adding in inflation means you need to multiply your yearly salary by 1.03 and then take 65% of that. Remember you’ll have to factor a 3% growth each year! Although, honestly, inflation could be so much more by the time as you get closer to retirement. A sobering thought.
How to Get Your Retirement Savings Above Average
Once you come up with a rough estimate of what you will probably need for retirement, you need to start saving more. Seriously. With the average savings figures what they are, chances are you are not saving enough. Here are a few simple tips to kick your savings into gear:
Save more. Add to whatever you are currently putting aside. Even a small amount, over a number of years, will add up. Put aside the most you possibly can.
Take advantage of any plans your employer may offer. If you haven’t already, find out if your place of work offers 401Ks. Many companies contribute matching funds up to a certain percentage of your salary. But make sure you know how your money is being invested. Just because Dave Ramsey says to “get your free money first” doesn’t always mean it’s a good idea, especially if your clueless in how it’s invested.
Open an Individual Retirement Account. Even if you have a 401K you can usually put aside extra funds into an IRA.
Remember, you may think you are prepared for retirement. But statistics show you probably aren’t.
Best Places to Kickstart Your Retirement Savings
It is never too late to kick your retirement savings into high gear. Getting started isn’t difficult.
All you need:
a brokerage account to hold your Traditional IRA or Roth IRA
the discipline to save each week or month
Here are some great places to open your Individual Retirement Account:
E*Trade
E*Trade is one of our favorite brokerage firms. With E*Trade, you get access to tools that can help both novices and seasoned investors reach their retirement goals. E*Trade is one of the best in the business, offering Traditional IRAs, Roth IRAs, and 401k rollovers.
When it comes to trades, E*Trade’s costs are extremely competitive at $0 on stocks, options, and ETFs.
Open an account with E*Trade to enjoy the perks of having an account with one of the best online brokers.
TD Ameritrade
TD Ameritrade makes the process of opening and funding your Roth IRA very easy. It can take you less than 15 minutes to open up a brand new IRA.
(That means you can’t say “I don’t have time to open a Roth IRA!”)
Even better, TD Ameritrade is willing to pay you to open an account with them. Bonuses range from simply being able to trade free for 60 days to up to $600 in cold hard cash deposited into your account.
Open an account with TD Ameritrade and get up to $600 just for opening an account.
Betterment
Betterment takes the issue of analysis by paralysis out of retirement accounts.
One of the common complaints people use as an excuse for not saving enough for retirement is that it is too difficult to choose investment options.
Deciding between ETFs and stock mutual funds, bond funds, and the like can be very confusing.
Not so with Betterment. The company uses a sliding scale of risk to balance your portfolio between two baskets of investments: a bond ETF basket and a stock ETF basket.
It’s incredibly simple and makes having to decide what to do a lot easier.
Plus, you get $25 if you open an account with at least $250.
Open an account with Betterment to kickstart your retirement savings.
Best Places to Open a Roth IRA (and Get Sign Up Bonuses, Too!)
Want to look at all of your options for brokerage firms? We’ve culled the list of major retirement account providers down to show you which ones are the best. We also want to make sure you are getting the most bang for your buck — brokerage firms offer big sign up bonuses for you to open an account with them.
If you’re going to open an account, you might as well get a bonus, right?
Here are the two resources we’ve created:
What are you waiting for? Stop putting off saving for retirement, get your saving into gear, and open a great account today to help you get there.
A common misbelief is that one must be rich to invest. It’s easy to invest with little money in a variety of assets and save for your goals. More platforms let you “micro invest” and purchase small amounts of expensive assets.
Even if you only invest a few dollars each month, that money can start building wealth.
Consistently investing small amounts can be more effective than waiting to accumulate a lump sum because you can earn compound interest.
Some people may never invest because they don’t think they have enough money.
In This Article
Best Ways to Start Investing with Little Money
It’s possible to invest as little as $5 at a time and diversify your portfolio. As your financial situation improves, you can increase your monthly investments and try more ideas.
1. Invest in Index Funds
Investing in index funds can be the best option to start investing small amounts of money.
First, index funds let you invest in hundreds of companies with a single investment to quickly diversify your portfolio and minimize risk.
Second, most index funds have low investing fees and expense ratios. For example, a fund with a 0.03% expense ratio costs 30 cents in annual fees.
Most brokers don’t charge trade commissions to buy or sell index funds. Paying fewer fees means you can invest more cash.
Some of the types of index funds you can invest in include:
US stocks
International stocks
Emerging markets
Corporate bonds
Government bonds
Real estate investment trusts (REITs)
The various online stock brokers offer stock and bond index exchange-traded funds (ETFs). These funds trade like individual stocks. The share price fluctuates during the market day and you can buy shares at any time.
Your 401k provider likely offers index mutual funds. The investing strategy is the same except the share price updates once a day after the stock market closes.
Most online brokers offer index funds and don’t charge any trade commissions. However, some can be easier to invest with when you have little money.
Minimum Investment: $5 (varies by broker)
Betterment
Using a robo-advisor like Betterment can be one of the easiest ways to invest in index funds. This fully-automated investing app automatically rebalances your portfolio to maintain your target asset allocation.
You can also enable tax-loss harvesting to minimize your taxable investment income by selling investment losses to offset your investment gains.
You will answer several questions about your age, investment goals and risk tolerance to recommend an investment portfolio of stock and bond index ETFs.
As you grow older, Betterment shifts your portfolio to a more conservative allocation.
Not having to manage your portfolio is one advantage of using a robo-advisor when you don’t have the time or desire to self-manage your investments.
Betterment also offers fractional investing so you can buy partial shares of funds to instantly diversify your portfolio.
Other brokers may require you to buy whole shares which makes buying multiple funds at once difficult if you have limited funds.
You can create a portfolio with $0 and start investing with a $10 initial deposit. The annual account fee for Betterment is 0.25% of your portfolio value.
Acorns
Another unique way to invest in index funds is by using Acorns. This micro-investing app invests your spare change by rounding up your debit and credit card purchases.
You can choose to invest in a premade portfolio of stocks and bonds with different risk levels.
Acorns buys fractional shares of index ETFs when with as little as $5. Taxable and retirement investment accounts are available along with an online checking account.
Monthly plan fees range between $1 and $5 per month.
2. Workplace Retirement Accounts
A workplace retirement account such as a 401k, 403b or a Thrift Savings Plan (TSP), this can be the best place to start investing with little money. See if your employer offers matching contributions. If so, invest enough each month to earn the full match and invest “free money.”
If your workplace doesn’t offer a retirement plan or matching contributions, you can open an individual retirement account (IRA). Most brokers offer IRAs with no account fees or minimum initial deposits. You have multiple investment options.
One perk of investing with a retirement account is the tax benefits. You only pay taxes once. Traditional contributions reduce your current annual income, grow tax-deferred and you pay income taxes when you make a withdrawal. Roth contributions require you to pay income taxes upfront but your withdrawals are tax-free.
Your workplace retirement account investment options can include:
Stock index mutual funds
Bond index mutual funds
Target date funds
Company stock
The investment options are different for each employer yet most plans offer target date funds. Choosing a target date fund that’s nearest to your planned retirement year can be a good option. The fund invests in stocks and bonds and adjusts to a conservative risk tolerance as retirement approaches.
If you only decide to invest in a target date fund, you won’t have to rebalance your asset allocation. However, you should monitor the target date fund performance. You may also decide to self-manage your portfolio by buying index funds to reduce your investment fees.
You can invest as little as $1 at a time into each fund. If you’re uncomfortable managing your own retirement account, Blooom can provide a free portfolio analysis and recommend a portfolio allocation.
Minimum investment: $1
3. Individual Stocks
After establishing an index fund portfolio, you may decide to buy stock in individual companies. There are many online brokers to choose from and most don’t charge account fees or trade commissions to buy or sell shares.
You may decide to buy dividend-paying stocks to earn consistent passive income. Another option is holding companies with strong growth potential that can beat the stock market but may not pay a dividend.
M1 Finance is one of the best free investing apps. You can buy fractional shares of stocks and ETFs with a minimum $25 investment. There are also premade ETF portfolios that can make it easier to diversify. As you invest new money, M1 rebalances your asset allocation.
The minimum initial deposit is $100 for taxable accounts and $500 for retirement accounts to start using M1 Finance.
You can also consider investing with Charles Schwab. You can buy fractional stock slices as small as $5 for many stocks and there are no trade fees or account minimums. But, you will need to self-manage your investment portfolio.
Minimum investment: $5
Tip: Using one of the top investment sites can make it easier to research stocks.
4. Crowdfunded Real Estate
Real estate is a longstanding way to earn passive income without relying on the stock market. However, owning investment properties is expensive and can be time-consuming.
Thanks to real estate crowdfunding, you can invest small amounts of money into commercial and multi-family real estate. These properties have multiple tenants and can provide a more stable income than a single-family rental property. A property manager screens the tenants, collects rent and makes repairs.
You can earn recurring dividends from monthly rent payments. It’s also possible to make money when a property sells for a higher value than the original purchase price.
DiversyFund is one of the best crowdfunding platforms. You can start investing as little as $500. The Growth REIT lets you invest in multifamily apartments across the United States.
One downside of crowdfunded real estate is the multi-year investment commitment. Most platforms require a five-year investment to avoid early redemption fees. As a tradeoff for the long-term commitment, you can earn annual returns that compete with the historical S&P 500 average return of 7% per year.
Minimum investment: $500
5. Small Business Bonds
The bond index funds you invest in hold corporate and government debt. Investing in small business bonds can help you earn a higher yield. Worthy Bonds yield 5% per year and let you invest as little as $10 at a time.
Each bond matures in 36 months but you can sell your position sooner with no early withdrawal penalty.
Read our Worthy Bonds review to learn more.
Minimum investment: $10
6. High-Yield Savings Accounts
It’s wise to keep cash that you need instant access to in a high-yield savings account. Banks are a low-risk way to earn passive income but your returns are not as high.
You might consider keeping your emergency fund in a high-yield savings account that doesn’t charge any account fees. Also, consider opening separate “sinking fund” accounts for various savings goals to avoid borrowing money. A savings account can also be a good place to park cash until you decide where to invest it and earn a higher potential return.
Ally Bank has a competitive interest rate for the high-yield savings account. There are no account fees or minimum balance requirements. The Surprise Savings booster tool can help you calculate a “safe-to-spend” amount and transfer your extra cash into savings.
Minimum investment: $1
7. Certificates of Deposit
Investing in stocks and bonds can provide higher investment returns but carry more risk. A bank certificate of deposit locks in a specific interest rate for the investment term. For example, a 12-month term CD has the same interest rate for the next 12 months.
Instead of keeping your free cash in an interest-bearing savings account, consider opening a bank CD with a similar or higher interest rate.
If the savings account interest rate drops, the CD can earn more interest until the CD matures. Most CDs have early redemption penalties if you withdraw the cash before the term ends. At the end of the term, you can redeem your CD balance penalty-free or renew the CD at the then-current term.
Some banks, including CIT Bank, offer no-penalty CDs. These CDs don’t charge an early withdrawal penalty but may offer lower yields than a term CD.
As bank interest rates are low, the passive income you earn from CDs can be lower than the inflation rate. But earning some interest income can be better than nothing.
Minimum investment: $100
8. Peer-to-Peer Investing
You earn income from savings accounts and bank CDs as the bank lends your money at a higher interest rate. Peer-to-peer lending platforms let you earn a higher rate as you lend directly to the borrower and bypass the bank.
Prosper lets you invest in crowdfunded personal loans with a three-year or five-year repayment term. Borrowers make monthly payments and you make money from the interest payment, minus a 1% service fee. The historical annual returns are between 3.5% and 7.6%.
You can lose money if the borrower defaults on the loan. To avoid losing money, Prosper lets you buy notes in $25 increments and recommends a $2,500 initial investment to properly diversify. You can invest in multiple loans to diversify your portfolio.
Prosper also assigns each borrower a risk rating and you can see basic credit profile details. There’s also an auto-invest feature that spreads your investment across multiple risk ratings. You might be able to easily diversify your portfolio by auto-investing and avoid investing in too many risky loans.
Minimum investment: $25
9. Physical Gold
Precious metals such as physical gold and silver are a popular alternative asset. Unless you invest in gold royalty stocks, you won’t earn dividend income. You make money by selling your precious metal investments above your purchase price.
Buying gold coins and bars can be one of the best ways to invest in gold. Physical gold is expensive and you may not be able to buy an entire ounce or gram at once.
Vaulted lets you buy fractional shares of physical gold bars. Your stash is held at the Royal Canadian Mint. Once your balance is high enough, you can request FedEx delivery to receive your physical gold. There is a 1.8% transaction fee to buy or sell and a 0.4% annual maintenance fee.
It’s also possible to invest in gold trust ETFs that trade on the stock market. Most investing apps let you trade these funds. The share price mimics the price of physical gold.
But most gold ETFs don’t offer physical delivery as the fund family owns the bullion.
Minimum investment: $10
10. Cryptocurrency
When you’re deciding what to invest in first, cryptocurrency probably isn’t going to be at the top of the list. After all, this digital asset is highly volatile and doesn’t earn interest.
Many people who buy crypto do so as an alternative to stocks and gold.
For example, you might buy cryptocurrency as a way to diversify once you hold a sufficient amount of stocks, index funds and gold.
The most popular cryptocurrency is Bitcoin. This cryptocoin has the best name recognition and more merchants accept it as payment instead of paper currency.
There are other “alt-coins” like Ethereum that can also be worth owning if you believe in the long-term potential of cryptocurrency.
It has been fairly difficult to buy cryptocurrency but more platforms are making it easy to buy cryptocurrency. PayPal and Square let you buy Bitcoin and use it to pay for purchases.
However, you won’t be able to move your Bitcoin balance off of their platform.
Another easy way to buy cryptocurrency is through an online broker like eToro. You can trade cryptocurrency futures after a minimum $50 initial deposit.
EToro also lets you copy the investment portfolios of experienced cryptocurrency investors which can improve your income potential.
A third way to buy cryptocurrency is using a digital currency exchange such as Coinbase. Buying directly from an exchange lets you own real Bitcoin and alt-coins. You can transfer them to a cryptocurrency wallet for added security from hackers.
No matter where you decide to buy cryptocurrency, you can buy fractional shares of Bitcoin and other coins. Investment minimums and transaction fees vary by platform.
Minimum investment: $2 (varies by platform)
11. Treasury Bonds
Most investors get exposure to government bonds by holding bond index funds in their brokerage account or 401k workplace retirement plan.
As bonds can be pricey and confusing to buy, bond funds make it easy to earn passive income.
You can have more control over which bonds you own by buying U.S. Treasury bonds. You can choose the maturity date. Each Treasury bond has a $100 minimum investment with a maturity date of up to 30 years.
It’s also possible to buy Treasury Inflation-Protected Securities (TIPs) as a hedge against future inflation.
Another option is purchasing Series I or Series EE Savings Bonds. Both types of savings bonds have a $25 minimum investment.
You can buy Treasury bonds from TreasuryDirect.
Minimum investment: $100 for Treasury notes and bonds ($25 for savings bonds)
12. Fine Wine
A long-term investing idea is owning fine wine. You can open a standard portfolio at Vinovest with a $1,000 minimum initial investment.
Vinovest automatically builds your wine portfolio making it easy to start if you’re unfamiliar with wine investing.
Each bottle in your portfolio remains in climate-controlled cellars across the world and is insured against damages. You decide when to sell your wine. It’s possible to request delivery if you want to open a bottle.
Collectible wine can increase in value as it ages and the scarcity of unopened bottles increases. Wine investing is like owning physical gold and doesn’t earn dividend income.
It can take up to 30 years to earn the best value before you sell a bottle.
Minimum investment: $1,000
13. Fine Art
Another unique investment option is investing in fine art. Masterworks lets you buy shares in classic and modern pieces with a $1,000 minimum investment.
The holding period for most pieces is between three and ten years. You earn a profit if the piece sells for a profit.
Due to the relatively high initial minimum investment and waiting years to earn income, you may invest small amounts of money in other ideas first to make money fast.
Minimum investments: $1,000
Summary
There are many ways to start investing little money today and earn recurring income. Many platforms have small minimum investments which make it easy to try several ideas and diversify your portfolio.
As you increase your income, you can boost your monthly investment.
How do you invest your money? Which idea are you going to try first?
Josh is a personal finance writer and Founder of MoneyBuffalo.com. He has been featured in publications like Student Loan Hero, Well Kept Wallet and the US News and World Report.
One of the keys when it comes to investing for the long term is to make sure you’re minimizing the fees you’re paying to invest your money.
Whether it’s plan administration fees for the company you’re investing with, mutual fund expense ratios and fees, or fees for added account functionality, the more you can minimize how much you’re paying, the better.
Morningstar reports that the average expense ratio for actively-managed equity mutual funds is 1.2% and investment-grade bond funds have an expense ratio of 0.9%. For me, I prefer to invest in mainly low-cost index funds with expense ratios that are much lower.
Beyond saving money on the expense ratios, I also would love to save money on the administration fees I pay in order to invest. My company 401(k) has fees just under 1%, which is way too much for my tastes. I’ve stopped investing there first since there is no company match.
This past week I was doing some research on the new slate of robo advisors that have popped up. One of them jumped out at me because the company is extremely affordable, but it also has shown some of the best results in the past couple of years. Not only do they invest your money for you in a slate of well-diversified ETF index funds, and rebalance your holdings on a regular basis, but they charge you a pretty minimal fee to do it.
This all sounded too good to be true, so I decided to do a full review of this new automated investing service called Axos Invest Managed Portfolios, to see what they are all about.
Axos Invest History
Axos Invest launched several years ago under the name WiseBanyan. They had the goal of being the world’s first completely free financial advisor.
Here’s their reasoning behind why they launched their site.
Herbert Moore and Vicki Zhou founded WiseBanyan after seeing that the incentives between financial advisors and clients were often misaligned. They saw this firsthand while working in asset management and investment banking respectively, and later as colleagues at a quantitative asset management firm. They realized that the main cause of misalignment was a conflict of financial interests, which often resulted in high fees, unnecessary tax consequences, and unreasonable account minimums for the clients. As a result, they set out to build a company that was not incentivized to earn money at its clients’ expense.
WiseBanyan began with the idea that investing is a right – not a privilege. Our mission is to ensure everyone can achieve their financial goals, which starts with investing as early as possible. This is why there is no minimum to start and we do not charge high fees. We hope you are as excited about WiseBanyan as we are, especially what it means for you, your friends, and society as a whole.
Axos Invest was launched with the hope of making investing easy, accessible, and cheap – even for beginning investors who could only invest a small amount every month.
While the service is no longer free (They started charging a 0.24% annual assets under management fee in 2020), they still practice the values of making investing more accessible and affordable for everyone.
WiseBanyan Holdings was acquired by Axos Financial, and as of October 2019 and moving forward the company formerly known as WiseBanyan is now known as Axos Invest.
Axos Invest has become a part of the Axos Financial online banking platform. Check out our full review of Axos Bank.
Axos Invest Account Types – Managed Portfolios Vs. Self-Directed Trading
After reading up a bit about Axos Invest I was intrigued enough to sign up for one of their accounts. I went to their site to find that there are a couple of different account types you can sign up for.
I was mainly interested in signing up for Managed Portfolios since I intended to use this as a robo-advisor to automatically invest, rebalance and reinvest my dividends for me. I wanted it to be hands-off.
If you prefer to research and invest in your own choices of individual stocks, the commission-free Self Directed Trading account may be a better choice for you.
If you’re an advanced trader the Self Directed Trading account has the “Axos Elite” subscription which gives you real-time market data, TipRanks market research, extended trading hours, margin trading, stock lending, and more for a monthly fee.
Head on over to the Axos site via my exclusive invite link below to get started on your Axos Invest account now:
Open Your FREE Axos Invest Account Now
Open an Axos Self Directed Trading account and deposit at least $2000, and you’ll get a $250 bonus for a limited time!. Open Axos Self Directed Trading
Opening An Account With Axos Invest
After going to the Axos Invest site to open my Managed Portfolios account, it dropped me right into a brief questionnaire to assess my risk tolerance, investment time horizon, and more.
While you’re answering the questions you’ll see a progress bar and a “current risk score” listed to the right, telling you just how conservative or aggressive Axos Invest believes you are.
My risk score went up and down throughout the survey based on my answers, and when I finally completed it gave me a risk score of 7.2. That would give me an estimated asset allocation of 65% stocks to 35% bonds – which seems about what most would suggest as I’m relatively conservative in my investments, and the bond allocation roughly matches my age (put your age in bonds!)
I decided that I wanted to change my risk score and asset allocation to be a bit more aggressive, however, and you can do that simply by moving the slider to the right (or left if you’re more conservative). I ended up with closer to 75/25 stocks to bond allocation.
After completing the survey you click on the “Open My Account” button, which takes you into the account opening process. It will ask for all of your personal information including an email, password, employment information, and Social Security number (like you would have to at any brokerage).
Once you’re done entering your personal information you’ll be asked to choose an account type. Currently, you can choose:
Taxable Investment Account
Roth IRA
SEP IRA
Traditional IRA
After you choose an account type you’ll be asked to link a bank to fund your account. You can then choose to fund the account with as little as $500. If you want, you can also set it up to automatically invest for you every month. I have it set to automatically invest $300 for me on the 15th and 30th of the month.
Once you’re done your account will be sent to Axos Financial for approval. Their site says it takes about 5 business days for an account to be approved.
Axos Invest Investment Philosophy
Axos Invest will invest your funds based on Modern Portfolio Theory (MPT).
We use the tools of Modern Portfolio Theory to design the optimal portfolio for a given level of risk. In addition, we further optimize our investment process to minimize tax consequences and streamline the reinvestment of dividends and contributions.
Their investment philosophy is built upon four main pillars:
The value of diversification
Keeping fees as low as possible
The value of passive investing
Starting sooner rather than later
Axos Invest will attempt to give you a portfolio that is well-diversified, low-cost, and at low minimums so just about anybody can get started now. They’ll use the ideas behind MPT to give you the optimal portfolio for your given risk score.
The Actual Investments
So what are you getting when you invest with Axos Invest? You’re getting a well-diversified portfolio that contains passively managed exchange-traded funds (“ETFs”).
The funds held with Axos Invest have an average fund fee of 0.12% – the only fees you’ll pay to invest. Here is the breakout for the individual funds they use (the funds used by Axos is subject to change, and probably will) and their expense ratios:
Vanguard Total Stock Market ETF (VTI): 0.03%
Schwab U.S. Broad Market (SCHB): 0.03%
Vanguard FTSE Developed Markets ETF (VEA): 0.05%
Schwab International Equity (SCHF): 0.06%
Vanguard FTSE Emerging Markets ETF (VWO): 0.15%
iShares Core MSCI Emerging Markets (IEMG): 0.14%
Vanguard REIT Index Fund (VNQ): 0.12%
iShares U.S. Real Estate (IYR): 0.42%
iShares Investment Grade Corporate Bond ETF (LQD): 0.15%
Vanguard Intermediate-Term Corporate Bond Index (VCIT): 0.05%
Vanguard Intmdte Tm Govt Bd ETF (VGIT): 0.05%
iShares Barclays TIPS Bond Fund (ETF) (TIP): 0.19%
State Street Global Advisors Barclays Short Term High Yield Bond Index ETF (SJNK): 0.40%
PIMCO 0-5 Year High Yield Corporate Bond Index (HYS): 0.56%
Vanguard Short-Term Corporate Bond (VCSH): 0.05%
As you can see they have a broad diversification that also includes real estate via the Vanguard REIT Index fund, which isn’t something that Betterment gives you.
The performance of Axos Invest has been pretty good. As you can see from the screenshot from Barron’s “Ranking the Robos” article below, WiseBanyan/Axos Invest had the second-best two-year annualized return, through 6/30/19. Not too bad!
Axos Invest Mobile App
When the service first came out one of the complaints some users had was that there was no mobile app for the service. A mobile-optimized app for iOS was released shortly thereafter, as well as an app for Android users.
From the app, you can now do things on the go like check your balances, view your allocations, make a quick deposit, and more. The apps really are very pretty to look at and are a pleasure to use.
Axos Invest Fees & Account Charges
One of the biggest draws for Axos Invest when they started was the fact that they were essentially a fee-free service. While that is no longer the case, they are still very low-cost, one of the lowest-cost robo-advisors on the market.
Here are a few of the fees (or lack thereof) that you’ll see with the service:
Managed Portfolios
Management fee: 0.24% of assets under management. Accounts less than $500 pay $1/month.
Trading fees: FREE
Rebalancing fees: FREE
Dividend reinvestment fee: FREE
Self-Directed Trading
Stock Trading fees: FREE
ETF Trading Fees: FREE
Options trading: $1 per contract
Self-Directed Trading – Axos Elite
Axos Elite is the premium self-directed investing service that offers more powerful investment tools, real-time market data, extended trading hours, lower fees, stock lending, and margin trading.
Monthly fee: $10/month
Stock Trading fees: FREE
ETF Trading Fees: FREE
Margin Trading: 5.5%
Options trading: $0.80 per contract with Axos Elite
So essentially the Axos Invest service is very low cost with only the 0.24% AUM fee for Managed Portfolios. There are no trading fees, and no fees to rebalance your account or reinvest dividends. Competing services often charge much higher annual management fees, so with Axos being one of the very lowest when it comes to fees, you’re saving on those fees right off the bat.
There are some fees related to transferring funds via wire transfer, or do a full account transfer out, although regular electronic funds transfers (EFT) are free.
Electronic Fund Transfer (EFT) fee: FREE for deposits or withdrawals.
Wire transfers in: FREE (although your bank may charge).
Wire transfers out: $30 per domestic wire transfer.
Account closing fee: FREE.
Full account transfer out fee: $75 per account.
Partial account transfer out fee: $5 per security ($25 minimum/$75 max).
Disbursement of funds by check by mail: $10 per check.
Returned check fee: $40 per occurrence.
As mentioned above, Axos Invest’s product and service is very low cost and there are only a few small fees for certain types of transfers or check disbursements.
Premium Add-On Products & Services
There are several premium packages in your Axos Invest account that have a fee associated with them. You can turn them off and on whenever you want.
Currently, the premium packages include:
Portfolio Plus: The ability to create your own custom portfolio from an expanded list of investments. You can choose from lists of different investment classes and types and add up to 20 investments to each portfolio you create. It costs $3/month to use this add-on package.
Quick Cash: When activated this gives you quick same-day deposits, auto-deposit scheduler, and overdraft protection. It costs $2/month to use this add-on package.
Tax Protection: This package will give you tax loss harvesting, selective trading (to remove ETFs you hold elsewhere to avoid the potential for wash sales) and IRAutomation, which helps you to maximize the use of your retirement account deposits, setup auto deposit plans and more. Each month the cost will be the lesser of 0.02% of your average Axos Invest account value (0.24% annually) or $20. So if you have $5,000 in your account, the monthly cost would be $1.
Using these add-on packages is purely optional, but even if you were to turn them all on it likely isn’t going to cost you more than a few bucks per month.
Axos Invest: Great For Cost-Conscious Investors
When I first read about Axos Invest I dismissed it out of hand because I thought that there had to be a catch somewhere, there’s no way they were offering this service for such a low cost when others are charging anywhere from .35%-1.0% annual management fees for similar services.
After looking into it further, however, it does truly seem like Axos Invest is committed to offering a low-cost investing service for both self-directed investors and those who want their portfolios managed for them.
Axos Invest does seem like a good option for newer investors. Not only can you start investing with no account minimums, and low management fees – but you can buy fractional shares with as little as $10 and get a highly diversified portfolio that should match the market in the long term.
The account has SIPC protection that covers up to $500,000 per client as well, so if Axos Invest were to go under you’d be covered.
I’ve signed up for my own Axos Invest account and have been with them now for years. They are my go-to recommendations for new (and even experienced) investors.
In Best Low-Risk Investments for 2023, I provided a comprehensive list of low-risk investments with predictable returns. But it’s precisely because those returns are low-risk that they also provide relatively low returns.
In this article, we’re going to look at high-yield investments, many of which involve a higher degree of risk but are also likely to provide higher returns.
True enough, low-risk investments are the right investment solution for anyone who’s looking to preserve capital and still earn some income.
But if you’re more interested in the income side of an investment, accepting a bit of risk can produce significantly higher returns. And at the same time, these investments will generally be less risky than growth stocks and other high-risk/high-reward investments.
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Determine How Much Risk You’re Willing to Take On
The risk we’re talking about with these high-yield investments is the potential for you to lose money. As is true when investing in any asset, you need to begin by determining how much you’re willing to risk in the pursuit of higher returns.
Chasing “high-yield returns” will make you broke if you don’t have clear financial goals you’re working towards.
I’m going to present a large number of high-yield investments, each with its own degree of risk. The purpose is to help you evaluate the risk/reward potential of these investments when selecting the ones that will be right for you.
If you’re looking for investments that are completely safe, you should favor one or more of the highly liquid, low-yield vehicles covered in Best Low-Risk Investments for 2023. In this article, we’re going to be going for something a little bit different. As such, please note that this is not in any way a blanket recommendation of any particular investment.
Best High-Yield Investments for 2023
Table of Contents
Below is my list of the 18 best high-yield investments for 2023. They’re not ranked or listed in order of importance. That’s because each is a unique investment class that you will need to carefully evaluate for suitability within your own portfolio.
Be sure that any investment you do choose will be likely to provide the return you expect at an acceptable risk level for your own personal risk tolerance.
1. Treasury Inflation-Protected Securities (TIPS)
Let’s start with this one, if only because it’s on just about every list of high-yield investments, especially in the current environment of rising inflation. It may not actually be the best high-yield investment, but it does have its virtues and shouldn’t be overlooked.
Basically, TIPS are securities issued by the U.S. Treasury that are designed to accommodate inflation. They do pay regular interest, though it’s typically lower than the rate paid on ordinary Treasury securities of similar terms. The bonds are available with a minimum investment of $100, in terms of five, 10, and 30 years. And since they’re fully backed by the U.S. government, you are assured of receiving the full principal value if you hold a security until maturity.
But the real benefit—and the primary advantage—of these securities is the inflation principal additions. Each year, the Treasury will add an amount to the bond principal that’s commensurate with changes in the Consumer Price Index (CPI).
Fortunately, while the principal will be added when the CPI rises (as it nearly always does), none will be deducted if the index goes negative.
You can purchase TIPS through the U.S. Treasury’s investment portal, Treasury Direct. You can also hold the securities as well as redeem them on the same platform. There are no commissions or fees when buying securities.
On the downside, TIPS are purely a play on inflation since the base rates are fairly low. And while the principal additions will keep you even with inflation, you should know that they are taxable in the year received.
Still, TIPS are an excellent low-risk, high-yield investment during times of rising inflation—like now.
2. I Bonds
If you’re looking for a true low-risk, high-yield investment, look no further than Series I bonds. With the current surge in inflation, these bonds have become incredibly popular, though they are limited.
I bonds are currently paying 6.89%. They can be purchased electronically in denominations as little as $25. However, you are limited to purchasing no more than $10,000 in I bonds per calendar year. Since they are issued by the U.S. Treasury, they’re fully protected by the U.S. government. You can purchase them through the Treasury Department’s investment portal, TreasuryDirect.gov.
“The cash in my savings account is on fire,” groans Scott Lieberman, Founder of Touchdown Money. “Inflation has my money in flames, each month incinerating more and more. To defend against this, I purchased an I bond. When I decide to get my money back, the I bond will have been protected against inflation by being worth more than what I bought it for. I highly recommend getting yourself a super safe Series I bond with money you can stash away for at least one year.”
You may not be able to put your entire bond portfolio into Series I bonds. But just a small investment, at nearly 10%, can increase the overall return on your bond allocation.
3. Corporate Bonds
The average rate of return on a bank savings account is 0.33%. The average rate on a money market account is 0.09%, and 0.25% on a 12-month CD.
Now, there are some banks paying higher rates, but generally only in the 1%-plus range.
If you want higher returns on your fixed income portfolio, and you’re willing to accept a moderate level of risk, you can invest in corporate bonds. Not only do they pay higher rates than banks, but you can lock in those higher rates for many years.
For example, the average current yield on a AAA-rated corporate bond is 4.55%. Now that’s the rate for AAA bonds, which are the highest-rated securities. You can get even higher rates on bonds with lower ratings, which we will cover in the next section.
Corporate bonds sell in face amounts of $1,000, though the price may be higher or lower depending on where interest rates are. If you choose to buy individual corporate bonds, expect to buy them in lots of ten. That means you’ll likely need to invest $10,000 in a single issue. Brokers will typically charge a small per-bond fee on purchase and sale.
An alternative may be to take advantage of corporate bond funds. That will give you an opportunity to invest in a portfolio of bonds for as little as the price of one share of an ETF. And because they are ETFs, they can usually be bought and sold commission free.
You can typically purchase corporate bonds and bond funds through popular stock brokers, like Zacks Trade, TD Ameritrade.
Corporate Bond Risk
Be aware that the value of corporate bonds, particularly those with maturities greater than 10 years, can fall if interest rates rise. Conversely, the value of the bonds can rise if interest rates fall.
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4. High-Yield Bonds
In the previous section we talked about how interest rates on corporate bonds vary based on each bond issue’s rating. A AAA bond, being the safest, has the lowest yield. But a riskier bond, such as one rated BBB, will provide a higher rate of return.
If you’re looking to earn higher interest than you can with investment-grade corporate bonds, you can get those returns with so-called high-yield bonds. Because they have a lower rating, they pay higher interest, sometimes much higher.
The average yield on high-yield bonds is 8.29%. But that’s just an average. The yield on a bond rated B will be higher than one rated BB.
You should also be aware that, in addition to potential market value declines due to rising interest rates, high-yield bonds are more likely to default than investment-grade bonds. That’s why they pay higher interest rates. (They used to call these bonds “junk bonds,” but that kind of description is a marketing disaster.) Because of those twin risks, junk bonds should occupy only a small corner of your fixed-income portfolio.
High Yield Bond Risk
In a rapidly rising interest rate environment, high-yield bonds are more likely to default.
High-yield bonds can be purchased under similar terms and in the same places where you can trade corporate bonds. There are also ETFs that specialize in high-yield bonds and will be a better choice for most investors, since they will include diversification across many different bond issues.
5. Municipal Bonds
Just as corporations and the U.S. Treasury issue bonds, so do state and local governments. These are referred to as municipal bonds. They work much like other bond types, particularly corporates. They can be purchased in similar denominations through online brokers.
The main advantage enjoyed by municipal bonds is their tax-exempt status for federal income tax purposes. And if you purchase a municipal bond issued by your home state, or a municipality within that state, the interest will also be tax-exempt for state income tax purposes.
That makes municipal bonds an excellent source of tax-exempt income in a nonretirement account. (Because retirement accounts are tax-sheltered, it makes little sense to include municipal bonds in those accounts.)
Municipal bond rates are currently hovering just above 3% for AAA-rated bonds. And while that’s an impressive return by itself, it masks an even higher yield.
Because of their tax-exempt status, the effective yield on municipal bonds will be higher than the note rate. For example, if your combined federal and state marginal income tax rates are 25%, the effective yield on a municipal bond paying 3% will be 4%. That gives an effective rate comparable with AAA-rated corporate bonds.
Municipal bonds, like other bonds, are subject to market value fluctuations due to interest rate changes. And while it’s rare, there have been occasional defaults on these bonds.
Like corporate bonds, municipal bonds carry ratings that affect the interest rates they pay. You can investigate bond ratings through sources like Standard & Poor’s, Moody’s, and Fitch.
Fund
Symbol
Type
Current Yield
5 Average Annual Return
Vanguard Inflation-Protected Securities Fund
VIPSX
TIPS
0.06%
3.02%
SPDR® Portfolio Interm Term Corp Bond ETF
SPIB
Corporate
4.38%
1.44%
iShares Interest Rate Hedged High Yield Bond ETF
HYGH
High-Yield
5.19%
2.02%
Invesco VRDO Tax-Free ETF (PVI)
PVI
Municipal
0.53%
0.56%
6. Longer Term Certificates of Deposit (CDs)
This is another investment that falls under the low risk/relatively high return classification. As interest rates have risen in recent months, rates have crept up on certificates of deposit. Unlike just one year ago, CDs now merit consideration.
But the key is to invest in certificates with longer terms.
“Another lower-risk option is to consider a Certificate of Deposit (CD),” advises Lance C. Steiner, CFP at Buckingham Advisors. “Banks, credit unions, and many other financial institutions offer CDs with maturities ranging from 6 months to 60 months. Currently, a 6-month CD may pay between 0.75% and 1.25% where a 24-month CD may pay between 2.20% and 3.00%. We suggest considering a short-term ladder since interest rates are expected to continue rising.” (Stated interest rates for the high-yield savings and CDs were obtained at bankrate.com.)
Most banks offer certificates of deposit with terms as long as five years. Those typically have the highest yields.
But the longer term does involve at least a moderate level of risk. If you invest in a CD for five years that’s currently paying 3%, the risk is that interest rates will continue rising. If they do, you’ll miss out on the higher returns available on newer certificates. But the risk is still low overall since the bank guarantees to repay 100% of your principle upon certificate maturity.
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7. Peer-to-Peer (P2P) Lending
Do you know how banks borrow from you—at 1% interest—then loan the same money to your neighbor at rates sometimes as high as 20%? It’s quite a racket, and a profitable one at that.
But do you also know that you have the same opportunity as a bank? It’s an investing process known as peer-to-peer lending, or P2P for short.
P2P lending essentially eliminates the bank. As an investor, you’ll provide the funds for borrowers on a P2P platform. Most of these loans will be in the form of personal loans for a variety of purposes. But some can also be business loans, medical loans, and for other more specific purposes.
As an investor/lender, you get to keep more of the interest rate return on those loans. You can invest easily through online P2P platforms.
One popular example is Prosper. They offer primarily personal loans in amounts ranging between $2,000 and $40,000. You can invest in small slivers of these loans, referred to as “notes.” Notes can be purchased for as little as $25.
That small denomination will make it possible to diversify your investment across many different loans. You can even choose the loans you will invest in based on borrower credit scores, income, loan terms, and purposes.
Prosper, which has managed $20 billion in P2P loans since 2005, claims a historical average return of 5.7%. That’s a high rate of return on what is essentially a fixed-income investment. But that’s because there exists the possibility of loss due to borrower default.
However, you can minimize the likelihood of default by carefully choosing borrower loan quality. That means focusing on borrowers with higher credit scores, incomes, and more conservative loan purposes (like debt consolidation).
8. Real Estate Investment Trusts (REITs)
REITs are an excellent way to participate in real estate investment, and the return it provides, without large amounts of capital or the need to manage properties. They’re publicly traded, closed-end investment funds that can be bought and sold on major stock exchanges. They invest primarily in commercial real estate, like office buildings, retail space, and large apartment complexes.
If you’re planning to invest in a REIT, you should be aware that there are three different types.
“Equity REITs purchase commercial, industrial, or residential real estate properties,” reports Robert R. Johnson, PhD, CFA, CAIA, Professor of Finance, Heider College of Business, Creighton University and co-author of several books, including The Tools and Techniques Of Investment Planning, Strategic Value Investing and Investment Banking for Dummies. “Income is derived primarily from the rental on the properties, as well as from the sale of properties that have increased in value. Mortgage REITs invest in property mortgages. The income is primarily from the interest they earn on the mortgage loans. Hybrid REITs invest both directly in property and in mortgages on properties.”
Johnson also cautions:
“Investors should understand that equity REITs are more like stocks and mortgage REITs are more like bonds. Hybrid REITs are like a mix of stocks and bonds.”
Mortgage REITs, in particular, are an excellent way to earn steady dividend income without being closely tied to the stock market.
Examples of specific REITs are listed in the table below (source: Kiplinger):
REIT
Equity or Mortgage
Property Type
Dividend Yield
12 Month Return
Rexford Industrial Realty
REXR
Industrial warehouse space
2.02%
2.21%
Sun Communities
SUI
Manufactured housing, RVs, resorts, marinas
2.19%
-14.71%
American Tower
AMT
Multi-tenant cell towers
2.13%
-9.00%
Prologis
PLD
Industrial real estate
2.49%
-0.77%
Camden Property Trust
CPT
Apartment complexes
2.77%
-7.74%
Alexandria Real Estate Equities
ARE
Research Properties
3.14%
-23.72%
Digital Realty Trust
DLR
Data centers
3.83%
-17.72%
9. Real Estate Crowdfunding
If you prefer direct investment in a property of your choice, rather than a portfolio, you can invest in real estate crowdfunding. You invest your money, but management of the property will be handled by professionals. With real estate crowdfunding, you can pick out individual properties, or invest in nonpublic REITs that invest in very specific portfolios.
One of the best examples of real estate crowdfunding is Fundrise. That’s because you can invest with as little as $500 or create a customized portfolio with no more than $1,000. Not only does Fundrise charge low fees, but they also have multiple investment options. You can start small in managed investments, and eventually trade up to investing in individual deals.
One thing to be aware of with real estate crowdfunding is that many require accredited investor status. That means being high income, high net worth, or both. If you are an accredited investor, you’ll have many more choices in the real estate crowdfunding space.
If you are not an accredited investor, that doesn’t mean you’ll be prevented from investing in this asset class. Part of the reason why Fundrise is so popular is that they don’t require accredited investor status. There are other real estate crowdfunding platforms that do the same.
Just be careful if you want to invest in real estate through real estate crowdfunding platforms. You will be expected to tie your money up for several years, and early redemption is often not possible. And like most investments, there is the possibility of losing some or all your investment principal.
Low minimum investment – $10
Diversified real estate portfolio
Portfolio Transparency
10. Physical Real Estate
We’ve talked about investing in real estate through REITs and real estate crowdfunding. But you can also invest directly in physical property, including residential property or even commercial.
Owning real estate outright means you have complete control over the investment. And since real estate is a large-dollar investment, the potential returns are also large.
For starters, average annual returns on real estate are impressive. They’re even comparable to stocks. Residential real estate has generated average returns of 10.6%, while commercial property has returned an average of 9.5%.
Next, real estate has the potential to generate income from two directions, from rental income and capital gains. But because of high property values in many markets around the country, it will be difficult to purchase real estate that will produce a positive cash flow, at least in the first few years.
Generally speaking, capital gains are where the richest returns come from. Property purchased today could double or even triple in 20 years, creating a huge windfall. And this will be a long-term capital gain, to get the benefit of a lower tax bite.
Finally, there’s the leverage factor. You can typically purchase an investment property with a 20% down payment. That means you can purchase a $500,000 property with $100,000 out-of-pocket.
By calculating your capital gains on your upfront investment, the returns are truly staggering. If the $500,000 property doubles to $1 million in 20 years, the $500,000 profit generated will produce a 500% gain on your $100,000 investment.
On the negative side, real estate is certainly a very long-term investment. It also comes with high transaction fees, often as high as 10% of the sale price. And not only will it require a large down payment up front, but also substantial investment of time managing the property.
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11. High Dividend Stocks
“The best high-yield investment is dividend stocks,” declares Harry Turner, Founder at The Sovereign Investor. “While there is no guaranteed return with stocks, over the long term stocks have outperformed other investments such as bonds and real estate. Among stocks, dividend-paying stocks have outperformed non-dividend paying stocks by more than 2 percentage points per year on average over the last century. In addition, dividend stocks tend to be less volatile than non-dividend paying stocks, meaning they are less likely to lose value in downturns.”
You can certainly invest in individual stocks that pay high dividends. But a less risky way to do it, and one that will avoid individual stock selection, is to invest through a fund.
One of the most popular is the ProShares S&P 500 Dividend Aristocrat ETF (NOBL). It has provided a return of 1.67% in the 12 months ending May 31, and an average of 12.33% per year since the fund began in October 2013. The fund currently has a 1.92% dividend yield.
The so-called Dividend Aristocrats are popular because they represent 60+ S&P 500 companies, with a history of increasing their dividends for at least the past 25 years.
“Dividend Stocks are an excellent way to earn some quality yield on your investments while simultaneously keeping inflation at bay,” advises Lyle Solomon, Principal Attorney at Oak View Law Group, one of the largest law firms in America. “Dividends are usually paid out by well-established and successful companies that no longer need to reinvest all of the profits back into the business.”
It gets better. “These companies and their stocks are safer to invest in owing to their stature, large customer base, and hold over the markets,” adds Solomon. “The best part about dividend stocks is that many of these companies increase dividends year on year.”
The table below shows some popular dividend-paying stocks. Each is a so-called “Dividend Aristocrat”, which means it’s part of the S&P 500 and has increased its dividend in each of at least the past 25 years.
Company
Symbol
Dividend
Dividend Yield
AbbVie
ABBV
$5.64
3.80%
Armcor PLC
AMCR
$0.48
3.81%
Chevron
CVX
$5.68
3.94%
ExxonMobil
XOM
$3.52
4.04%
IBM
IBM
$6.60
5.15%
Realty Income Corp
O
$2.97
4.16%
Walgreen Boots Alliance
WBA
$1.92
4.97%
12. Preferred Stocks
Preferred stocks are a very specific type of dividend stock. Just like common stock, preferred stock represents an interest in a publicly traded company. They’re often thought of as something of a hybrid between stocks and bonds because they contain elements of both.
Though common stocks can pay dividends, they don’t always. Preferred stocks on the other hand, always pay dividends. Those dividends can be either a fixed amount or based on a variable dividend formula. For example, a company can base the dividend payout on a recognized index, like the LIBOR (London Inter-Bank Offered Rate). The percentage of dividend payout will then change as the index rate does.
Preferred stocks have two major advantages over common stock. First, as “preferred” securities, they have a priority on dividend payments. A company is required to pay their preferred shareholders dividends ahead of common stockholders. Second, preferred stocks have higher dividend yields than common stocks in the same company.
You can purchase preferred stock through online brokers, some of which are listed under “Growth Stocks” below.
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Preferred Stock Caveats
The disadvantage of preferred stocks is that they don’t entitle the holder to vote in corporate elections. But some preferred stocks offer a conversion option. You can exchange your preferred shares for a specific number of common stock shares in the company. Since the conversion will likely be exercised when the price of the common shares takes a big jump, there’s the potential for large capital gains—in addition to the higher dividend.
Be aware that preferred stocks can also be callable. That means the company can authorize the repurchase of the stock at its discretion. Most will likely do that at a time when interest rates are falling, and they no longer want to pay a higher dividend on the preferred stock.
Preferred stock may also have a maturity date, which is typically 30–40 years after its original issuance. The company will typically redeem the shares at the original issue price, eliminating the possibility of capital gains.
Not all companies issue preferred stock. If you choose this investment, be sure it’s with a company that’s well-established and has strong financials. You should also pay close attention to the details of the issuance, including and especially any callability provisions, dividend formulas, and maturity dates.
13. Growth Stocks
This sector is likely the highest risk investment on this list. But it also may be the one with the highest yield, at least over the long term. That’s why we’re including it on this list.
Based on the S&P 500 index, stocks have returned an average of 10% per year for the past 50 years. But it is important to realize that’s only an average. The market may rise 40% one year, then fall 20% the next. To be successful with this investment, you must be committed for the long haul, up to and including several decades.
And because of the potential wide swings, growth stocks are not recommended for funds that will be needed within the next few years. In general, growth stocks work best for retirement plans. That’s where they’ll have the necessary decades to build and compound.
Since most of the return on growth stocks is from capital gains, you’ll get the benefit of lower long-term capital gains tax rates, at least with securities held in a taxable account. (The better news is capital gains on investments held in retirement accounts are tax-deferred until retirement.)
You can choose to invest in individual stocks, but that’s a fairly high-maintenance undertaking. A better way may be to simply invest in ETFs tied to popular indexes. For example, ETFs based on the S&P 500 are very popular among investors.
You can purchase growth stocks and growth stock ETFs commission free with brokers like M1 Finance, Zacks Trade, Wealthsimple.
14. Annuities
Annuities are something like creating your own private pension. It’s an investment contract you take with an insurance company, in which you invest a certain amount of money in exchange for a specific income stream. They can be an excellent source of high yields because the return is locked in by the contract.
Annuities come in many different varieties. Two major classifications are immediate and deferred annuities. As the name implies, immediate annuities begin paying an income stream shortly after the contract begins.
Deferred annuities work something like retirement plans. You may deposit a fixed amount of money with the insurance company upfront or make regular installments. In either case, income payments will begin at a specified point in the future.
With deferred annuities, the income earned within the plan is tax-deferred and paid upon withdrawal. But unlike retirement accounts, annuity contributions are not tax-deductible. Investment returns can either be fixed-rate or variable-rate, depending on the specific annuity setup.
While annuities are an excellent idea and concept, the wide variety of plans as well as the many insurance companies and agents offering them, make them a potential minefield. For example, many annuities are riddled with high fees and are subject to limited withdrawal options.
Because they contain so many moving parts, any annuity contracts you plan to enter into should be carefully reviewed. Pay close attention to all the details, including the small ones. It is, after all, a contract, and therefore legally binding. For that reason, you may want to have a potential annuity reviewed by an attorney before finalizing the deal.
15. Alternative Investments
Alternative investments cover a lot of territory. Examples include precious metals, commodities, private equity, art and collectibles, and digital assets. These fall more in the category of high risk/potential high reward, and you should proceed very carefully and with only the smallest slice of your portfolio.
To simplify the process of selecting alternative assets, you can invest through platforms such as Yieldstreet. With a single cash investment, you can invest in multiple alternatives.
“Investors can purchase real estate directly on Yieldstreet, through fractionalized investments in single deals,” offers Milind Mehere, Founder & Chief Executive Officer at Yieldstreet. “Investors can access private equity and private credit at high minimums by investing in a private market fund (think Blackstone or KKR, for instance). On Yieldstreet, they can have access to third-party funds at a fraction of the previously required minimums. Yieldstreet also offers venture capital (fractionalized) exposure directly. Buying a piece of blue-chip art can be expensive, and prohibitive for most investors, which is why Yieldstreet offers fractionalized assets to diversified art portfolios.”
Yieldstreet also provides access to digital asset investments, with the benefit of allocating to established professional funds, such as Pantera or Osprey Fund. The platform does not currently offer commodities but plans to do so in the future.
Access to wide array of alternative asset classes
Access to ultra-wealthy investments
Can invest for income or growth
Learn More Now
Alternative investments largely require thinking out-of-the-box. Some of the best investment opportunities are also the most unusual.
“The price of meat continues to rise, while agriculture remains a recession-proof investment as consumer demand for food is largely inelastic,” reports Chris Rawley, CEO of Harvest Returns, a platform for investing in private agriculture companies. “Consequently, investors are seeing solid returns from high-yield, grass-fed cattle notes.”
16. Interest Bearing Crypto Accounts
Though the primary appeal of investing in cryptocurrency has been the meteoric rises in price, now that the trend seems to be in reverse, the better play may be in interest-bearing crypto accounts. A select group of crypto exchanges pays high interest on your crypto balance.
One example is Gemini. Not only do they provide an opportunity to buy, sell, and store more than 100 cryptocurrencies—plus non-fungible tokens (NFTs)—but they are currently paying 8.05% APY on your crypto balance through Gemini Earn.
In another variation of being able to earn money on crypto, Crypto.com pays rewards of up to 14.5% on crypto held on the platform. That’s the maximum rate, as rewards vary by crypto. For example, rewards on Bitcoin and Ethereum are paid at 6%, while stablecoins can earn 8.5%.
It’s important to be aware that when investing in cryptocurrency, you will not enjoy the benefit of FDIC insurance. That means you can lose money on your investment. But that’s why crypto exchanges pay such high rates of return, whether it’s in the form of interest or rewards.
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17. Crypto Staking
Another way to play cryptocurrency is a process known as crypto staking. This is where the crypto exchange pays you a certain percentage as compensation or rewards for monitoring a specific cryptocurrency. This is not like crypto mining, which brings crypto into existence. Instead, you’ll participate in writing that particular blockchain and monitoring its security.
“Crypto staking is a concept wherein you can buy and lock a cryptocurrency in a protocol, and you will earn rewards for the amount and time you have locked the cryptocurrency,” reports Oak View Law Group’s Lyle Solomon.
“The big downside to staking crypto is the value of cryptocurrencies, in general, is extremely volatile, and the value of your staked crypto may reduce drastically,” Solomon continues, “However, you can stake stable currencies like USDC, which have their value pegged to the U.S. dollar, and would imply you earn staked rewards without a massive decrease in the value of your investment.”
Much like earning interest and rewards on crypto, staking takes place on crypto exchanges. Two exchanges that feature staking include Coinbase and Kraken. These are two of the largest crypto exchanges in the industry, and they provide a wide range of crypto opportunities, in addition to staking.
Invest in Startup Businesses and Companies
Have you ever heard the term “angel investor”? That’s a private investor, usually, a high net worth individual, who provides capital to small businesses, often startups. That capital is in the form of equity. The angel investor invests money in a small business, becomes a part owner of the company, and is entitled to a share of the company’s earnings.
In most cases, the angel investor acts as a silent partner. That means he or she receives dividend distributions on the equity invested but doesn’t actually get involved in the management of the company.
It’s a potentially lucrative investment opportunity because small businesses have a way of becoming big businesses. As they grow, both your equity and your income from the business also grow. And if the business ever goes public, you could be looking at a life-changing windfall!
Easy Ways to Invest in Startup Businesses
Mainvest is a simple, easy way to invest in small businesses. It’s an online investment platform where you can get access to returns as high as 25%, with an investment of just $100. Mainvest offers vetted businesses (the acceptance rate is just 5% of business that apply) for you to invest in.
It collects revenue, which will be paid to you quarterly. And because the minimum required investment is so small, you can invest in several small businesses at the same time. One of the big advantages with Mainvest is that you are not required to be an accredited investor.
Still another opportunity is through Fundrise Innovation Fund. I’ve already covered how Fundrise is an excellent real estate crowdfunding platform. But through their recently launched Innovaton Fund, you’ll have opportunity to invest in high-growth private technology companies. As a fund, you’ll invest in a portfolio of late-stage tech companies, as well as some public equities.
The purpose of the fund is to provide high growth, and the fund is currently offering shares with a net asset value of $10. These are long-term investments, so you should expect to remain invested for at least five years. But you may receive dividends in the meantime.
Like Mainvest, the Fundrise Innovation Fund does not require you to be an accredited investor.
Low minimum investment – $10
Diversified real estate portfolio
Portfolio Transparency
Final Thoughts on High Yield Investing
Notice that I’ve included a mix of investments based on a combination of risk and return. The greater the risk associated with the investment, the higher the stated or expected return will be.
It’s important when choosing any of these investments that you thoroughly assess the risk involved with each, and not focus primarily on return. These are not 100% safe investments, like short-term CDs, short-term Treasury securities, savings accounts, or bank money market accounts.
Because there is risk associated with each, most are not suitable as short-term investments. They make most sense for long-term investment accounts, particularly retirement accounts.
For example, growth stocks—and most stocks, for that matter—should generally be in a retirement account. While there will be years when you will suffer losses in your position, you’ll have enough years to offset those losses between now and retirement.
Also, if you don’t understand any of the above investments, it will be best to avoid making them. And for more complicated investments, like annuities, you should consult with a professional to evaluate the suitability and all the provisions it contains.
FAQ’s on High Yield Investment Options
What investment has the highest yield?
The investment with the highest yield will vary depending on a number of factors, including current market conditions and the amount of risk an investor is willing to take on. Generally speaking, investments with the potential for high yields also come with a higher level of risk, so it’s important for investors to carefully consider their options and choose investments that align with their financial goals and risk tolerance.
Some examples of high-yield investments include:
1. Stocks: Some stocks may offer high dividend yields, which is the annual dividend payment a company makes to its shareholders, expressed as a percentage of the stock’s current market price.
2. Real estate: Investing in real estate, either directly by purchasing property or indirectly through a real estate investment trust (REIT), can potentially generate high returns in the form of rental income and appreciation of the property value.
3. High-yield bonds: High-yield bonds, also known as junk bonds, are bonds that are issued by companies with lower credit ratings and thus offer higher yields to compensate for the added risk.
4. Private lending: Investing in private loans, such as through peer-to-peer lending platforms, can potentially offer high yields, but it also carries a higher level of risk.
5. Commodities: Investing in commodities, such as precious metals or oil, can potentially generate high returns if the prices of those commodities rise. However, the prices of commodities can also be volatile and subject to market fluctuations.
It’s important to note that these are just examples and not recommendations. As with any investment, it’s crucial to carefully research and consider all the potential risks and rewards before making a decision.
Where can I invest my money to get high returns?
There are a number of places you can invest your money to get high returns. One option is to invest in stocks, which typically offer higher returns than other investment options. Another option is to invest in bonds, which are considered a relatively safe investment option.
You could also invest in real estate, which has the potential to provide high returns if done correctly. Finally, you could also invest in commodities, such as gold or silver, which can be a risky investment but can also offer high returns.
What investments can I make a 10% return?
It’s difficult to predict exactly what investments will generate a 10% return, as investment returns can vary depending on a number of factors, including market conditions and the performance of the specific investment. Some investments, such as stocks and real estate, have the potential to generate returns in excess of 10%, but they also come with a higher level of risk. It’s important to remember that past performance is not necessarily indicative of future results, and that all investments carry some degree of risk