Even though CDs and money markets are offering better returns than two years ago, their 5-5.5% yields still lag behind inflation and growth needs. The solution? Embrace higher risk for potentially higher returns.
While CDs and money markets are making significantly more now than they were just 2 years ago, 5-5.5% still isn’t a whole lot, especially if you consider inflation and have a desire for growth.
The answer to how to make a better return might seem obvious, but it is true: take more risk.
CDs and money markets are about as low risk of an investment as possible, since nobody knows for certain what the future holds, and they practically guarantee interest payment.
The downside is that since the risk is so low, the return reflects that. In the same way, if you were to take a calculated risk and buy some good stocks or mutual funds, your risk would increase, but your return would as well (as long as you buy the right ones).
The thing about risk is it is highly customizable — you don’t have to buy 1,000 shares of GameStop in order to see your portfolio do well.
Let’s take an example of someone who has a low risk tolerance, but they decide to get a little bit of exposure to the stock market. This person may fit into a 40/60 portfolio, that will include 40% stocks and 60% bonds.
In tough markets like we saw in 2008, 2020 and 2022, a person fully invested in the S&P 500 would have been down 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 like the first one, can make even the most seasoned investors shaky. However, if someone was using a 40/60 strategy, they would have only been down 22.18%, 16.46% and 13.33% at the very worst times in those bad markets.
On the other hand, coming out of the bad markets they would have reaped 28.01%, 42.45% and 20.83% respectively in the 18 months following the low point, which dwarfs the rates from a CD and money market.
In conclusion, taking some risk can help you make more money. If managed properly you can ride out the lows in the market and come out on top over the long haul.
Intended for educational purposes only. Opinions expressed are not intended as investment advice or to predict future performance. Past performance does not guarantee future results. Neither the information presented, nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Consult your financial professional before making any investment decisions. Opinions expressed are subject to change without notice.
