How to invest and earn a 5% (or more) return. (2023)

A few weeks ago, a reader emailed me asking where he should invest his money for long-term growth. He had $20,000 in net cash to invest and wanted to ensure a return ofat least5%.

Well, not all of us.

Given that the average "high interest savings account" offers up to 2% APY and CDs don't pay much more, there are few completely "safe" options available in today's economic environment. But with inflation hovering around 2% per year, it's critical to invest in a way that helps you stay ahead. If you keep all your excess funds in a regular savings account year after year, you're actually losing money in the long run.

Although investments are fickle andno guaranteesAnyone can earn a specified return in any period of time. Still, I'd like to offer some advice to this guy and anyone else wondering the same thing. The reality is that there are many ways to invest your money thathe mustReturn 5% or more if you are willing to invest your money and leave it alone.

Here are your best options:

Stocks, mutual funds and ETFs

Historical records show that since its inception in 1928 (and through the end of 2017), the S&P 500 has had an average annual return of 10%. While the S&P 500 only includes 500 stocks selected by the S&P 500 Index Committee, they are carefully chosen based on past performance, industry, and liquidity.

Investing in individual stocks can absolutely yield a return of more than 5%, but you could also lose your shirt. According to financial adviser Alex Whitehouse of FinHealthy.com, which is why many investors choose to keep their money inmutual funds or ETFthat help them gain exposure to stocks, bonds, and other securities without putting their eggs in one basket.

“Most ETFs stick to an investment theme or track a specific index like the S&P 500,” he says.

But how should you choose ETFs that can provide a strong return? Whitehouse says that when ETF selection, it's important to understand what the ETF has (its holdings), how much it costs (the expense ratio), and how easy it is to sell (liquidity).

According to investment adviser Don Roork ofAssetDynamics Wealth ManagementInvestors of all ages like ETFs because they tend to have low operating costs and higher tax efficiency compared to actively managed mutual funds. They also “combine the features of a mutual fund with the convenience and flexibility of stock trading,” she says.

When it comes to investing in ETFs, both advisers point out that you should invest your money for the long term and expect some volatility.

Bonds and Bond Mutual Funds

If you're expecting a 5% return, individual bonds may not be the ticket. Actually,Financial Advisor Anthony Montenegro of Blackmont Groupsays that some securities can even give negative returns. So why would anyone invest in bonds? Most bondholders do this for the benefit of income. They also do this to avoid some of the dramatic ups and downs of the stock market.

“As a bondholder, you are in the position of a creditor,” Montenegro said. “You can lend to a corporation like Apple or to a state or county like local public works or the school district, and the companies pay out of their revenue.”

While bonds are offered in almost every industry, some investors swear by municipal bondsas they typically provide returns in excess of 5% and usually come with the added benefit of being federally tax free. If you're looking to get into this market, Forbes contributor Brett Owens suggests five different municipal funds that offer returns above 5%: BlackRock MuniYield, Invesco Value Muni Income, Nuveen AMT-Free Municipal Credit Income, Nuveen Quality Muni Income , and Invesco Muni investment grade.

You can also invest in portfolios of high yield bonds, as long as you understand that they are generally made up of lower quality bonds and are therefore subject to higher levels of risk. The Fidelity Capital & Income Fund (FAGIX) recently offered a return of 4.01% on an expense ratio of 0.67%, for example. That's not exactly 5%, but you're getting close.

Also check out Vanguard's High Yield Corporate Fund Investor Stock (VWEHX), which reported a return of 8.22% since inception on an expense ratio of just 0.23%. Ultimately, the BlackRock High Yield Bond Fund (BHYIX) has returned investors 7.22% since its inception on October 31, 2018, with an expense ratio of 0.62%.

Real estate

Most people believe that real estate is a solid investment option for returns above 5%, but national real estate yields have barely kept up with cash over the long term. Additionally, owning and maintaining primary real estate can be expensive, not to mention stressful. Let's be honest; many people do not want to take on the job of a homeowner.

Taking this into account, san diego financial advisorTaylor Schulte says it might make sense to invest in a REIT instead of physical real estate. REITs allow you to invest in real estate without the hands-on work required of homeowners, and often do so with better long-term returns. As Schulte points out, the Vanguard Real Estate Index Fund (VGSIX) has averaged approximately 8.8% per year over the past 15 years, according to Morningstar.

Also consider investing with aonline real estate platform like Fundrise. This platform allows you to diversify your real estate investments with low current costs and potential for additional income and long-term growth. The platform's historical returns have ranged from 8.76% to 11.44% since 2014 and the minimum investment starts at just $500 for the Fundrise startup portfolio.

peer-to-peer lending

Another investment option to consider that has a potential return of over 5% is peer-to-peer lending, and specifically LendingClub. This platform connects borrowers with investors who lend money as if they were the bank. Investors can spread their funds across multiple loans in $25 increments to reduce risk, and returns can be significantly better than 5% for loans made to riskier borrowers.

LendingClub's returns have historically been between 3% and 8% and the platform reports that 99% of portfolios with 100+ notes earn positive returns. You can also start investing with as little as $1,000, making it a smart choice for both established investors and those just starting out in the game.

annual fees

Annuities offer another way to save for retirement or the future, and they come in many forms. Although annuities are complex and difficult to explain, the most important thing to remember is that they are designed to provide you with ongoing returns.When you buy an annuity, you are contracting with an insurance company that usually promises you a payment every month.

However, things get complicated when you start talking about the different types of annuities. While a fixed-rate annuity promises a specific payment each month, a variable annuity offers variable returns that depend on the performance of the underlying investments. On the other hand, onefixed index annuity, or AIF, (also called a share-linked annuity) is a hybrid between a fixed annuity and a variable annuity. AIFs offer more potential for higher returns than a fixed annuity, but less volatility than a variable annuity.

AIFs offer the guaranteed capital benefit, which means you won't lose your initial investment. But like all annuities, they come with a redemption fee that you'll need to pay if you withdraw your annuity early.

The main selling point of AIFs is that while they limit your upside when the market is rising, they protect you from loss during years when the underlying market is losing. AIFs also come with income generators that provide additional returns to investors. Keep in mind, however, that most income increases stop once you start receiving distributions from your annuity.

Because individual annuities are as complicated as they are unique, this is the short version of the story. The bottom line is that fixed index annuities may make sense for people who have some time before they need to retire and want to diversify some of their holdings away from the stock market. You can also guarantee a return of more than 5% with an annuity, although you should pay close attention to surrender charges, fees, and the investment schedule.

If you need to keep your assets liquid for whatever reason, annuities may not be for you.

Conclusion

If you want to ensure that your investments return at least 5% year after year, it's smart to consider all the options available to you, even those you've never heard of before. On the other hand, it is important to always remember thegolden rule of investing too- the rule that says thatPast performance is not a guarantee of future results.

Also be sure to ask some important questions before investing. Do you need to keep your assets liquid so that you can access them in the near future? Or are you prepared to invest for the long term?

"When investing any amount of money, it's important to understand what your goals are," says Colorado financial planner Mitchell Bloom of Financial Bloom.However, it is equally important to know where your money is going and how comfortable you are with risk.

"Once you know what your time horizon is, you figure out what your risk tolerance level is and what kind of investment temperament you're comfortable with," Bloom says.

One fact is certain. The more risk you're willing to take, the closer you'll be to earning a return of 5% or more year-over-year.