Finding Higher Investment Returns (and Realistic Returns)

by Gary Foreman

We’d all like to get higher investment returns. But is 10 to 12% per year a realistic goal? We explore finding higher (and realistic!) investment returns.

Gary,
I have read a lot on saving money and retirement. In most of the articles, it is stated that you can get investment returns of 10% or 12%. Where do you go to find higher investment returns? If you have to invest in the stock market, where do you find a person to help you do this without them getting most of your money for helping you?
Joy

Joy asks two very good questions. What is a reasonable investment return for her retirement savings? And, what does she need to do to earn it? We’ll begin by looking at the return question.

Is 10 to 12% Per Year a Realistic Goal?

The first thing for Joy to remember is that as the potential return increases, so does the risk of loss of part or all of her investment. But not all risks are the same. She needs to evaluate the risks.

Low-Risk vs. Greater-Risk Investments

For instance, with a CD, she’ll have a bank guarantee that she can have 100% of her principal back any time she wants it (minus any interest penalties for early withdrawal). But it’s not risk-free. There is the risk that inflation will reduce the purchasing power of her investment. Probably not much in one year, but it adds up over a number of years.

She could choose to invest in stocks. Greater risk but also a greater possible reward. The risk is different, however. No one can guarantee that any stock, fund or market will go up in the next year. So there’s greater risk for the next year.

But, suppose that Joy is years away from retirement. If she’ll be keeping her investment for ten years and is willing to own a variety of companies, the risk can be largely eliminated. For instance, the Dow Jones Industrials have gone up in every ten-year period going back for over 100 years, including the depression years.

• How To Minimize 4 Risks to Your Retirement Savings
• Investment Basics: How Diversification Can Protect Your Money

Consider the Compounded Annual Growth Rate of Investments

One other interesting item. What Joy really needs to know is what the Compounded Annual Growth Rate (CAGR) is. That’s not the same as asking what the “average” return is. The difference is in how compounding affects up and down years. You could do the math manually, but a financial calculator is much easier.

Back to Joy’s original question. Is 10% possible? Yes, as a matter of fact, it is. The S&P 500 CAGR has been in the range of 10.5 to 11% per year for 10-year periods since 1926. So if Joy can just do as well as the historic market average, she should do okay.

What About Bonds?

Over the long term, stocks will outperform long risk-free bonds by about 6%. So, if Joy wants to be in that 10% range, she’ll need to stay with stocks.

When I was an investment advisor, I never wanted an investor to be 100% in one type of investment. I believed then (and still do now) that a more balanced approach is best. Some stock funds, some bond funds, some CDs, some inflation hedge. Basing your decision solely on potential return is a good way to lose money.

Where Can You Get Help Finding Higher Investment Returns?

Now, to the second part of Joy’s question. Where can she get advice in selecting investments? Selecting individual stocks is not a good idea. Finding a good broker will be difficult. When I was a broker, we were instructed to find 200 clients who could produce $1,000 worth of commissions in a year. Very few retirement accounts are that large. So, Joy would always be at the bottom of the broker’s list.

Why You Should Consider an Index Fund

Joy will do much better investing in something called an “index fund.” Not only can an index fund earn you the stock market average, but it will also do so with minimal expenses since it doesn’t need a large staff to decide which stocks to buy and sell.

The Securities and Exchange Commission (SEC) website describes an index fund as a “mutual fund or Unit Investment Trust whose investment objective typically is to achieve the same return as a particular market index, such as the S&P 500 Composite Stock Price Index, the Russell 2000 Index, or the Wilshire 5000 Total Market Index.” Typically, they do that by adopting the same mix as the index. One other advantage to index funds is that they generally have very low fund management fees compared to funds that try to beat the averages.

Joy will need to do a little research before choosing a fund. But it’s not something that’s too difficult for the average adult. She can find help online at The Motley Fool site. And there are numerous books on the subject. Any by John Bogle are excellent. He’s the man who literally invented the mutual fund back in the 1950s and was a supporter of index funds.

If Joy wants to take an active part in managing her retirement portfolio, she might want to select a couple of different index funds. Different indexes will behave differently in different economies and a changing world. For instance, NASDAQ will be more affected by technology stocks than the Dow Jones Industrials. Suppose she’s bullish on technology. She should have more of a NASDAQ index and less of the Dow Jones one.

Bottom line? Over the long term, Joy should be able to find higher investment returns and earn about 8 to 10% on her retirement savings without spending a lot of time or money managing her investments.

• Using Compound Interest To Boost the Rate of Return on Your Savings
• 6 Types of Investment Fees You Need To Uncover
• Measuring Your Investment Returns
• Where Can You Earn a Good Compound Rate of Return?
• 7 Questions To Ask a Potential Financial Advisor

Reviewed September 2023

About the Author

Gary Foreman is a former financial planner and purchasing manager who founded The Dollar Stretcher.com website and newsletters in 1996. He's the author of How to Conquer Debt No Matter How Much You Have and he's been featured in MSN Money, Yahoo Finance, Fox Business, The Nightly Business Report, US News Money, Credit.com and CreditCards.com.