Although CDs and money markets offer better returns than they did two years ago, their 5-5.5% yields still fall short of inflation and growth needs. The solution? Take more risk for potentially higher returns.
Although CDs and money markets are yielding significantly more today than they were two years ago, 5-5.5% is still not a lot, especially when you take inflation into account and have growth potential.
The answer to the question of how to achieve better returns may be obvious, but it is true: take more risks.
CDs and money markets are less risky than any other form of investment because no one knows the future exactly and they offer a virtually guaranteed interest payment.
The downside is that because the risk is small, it is reflected in the return. If you take a calculated risk and buy some good stocks or mutual funds, your risk will increase, but so will your return (assuming you buy the right ones).
The advantage of risk is that it is highly customizable – you don’t have to buy 1,000 GameStop shares to get a good performance out of your portfolio.
For example, let’s take someone who has a low risk tolerance but decides to invest a little in the stock market. A 40/60 portfolio that includes 40% stocks and 60% bonds might be appropriate for that person.
In difficult markets like 2008, 2020, and 2022, a person fully invested in the S&P 500 would have lost 57.4% (10/11/07-3/6/09), 35.6% (2/19/2020-3/23/2020), and 27.47% (1/4/22-10/13/22). These are big swings, and some, especially the first one, can scare even the most experienced investors. However, if someone had followed a 40/60 strategy, they would have only been down 22.18%, 16.46%, and 13.33% during the worst of those bad markets.
On the other hand, after returning from the bad markets, they would have made gains of 28.01%, 42.45% and 20.83% respectively in the 18 months following the low point, which far dwarfs the interest rates on the CDS and money markets.
In summary, taking on some risk can help you make more money. If you do it right, you can ride out the lows of the market and emerge a winner in the long run.
For educational purposes only. Opinions expressed do not constitute investment advice and are not intended to predict future results. Past performance is not a guarantee of future results. Neither the information presented nor the opinions expressed constitute a solicitation to buy or sell any securities. Consult your financial advisor before making any investment decisions. Opinions expressed are subject to change without notice.
