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Understanding the concept of return on investment (ROI) is the first step to possibly generating a 10%+ return. Keep in mind, however, that a 10%+ ROI is not a guaranteed result. ROI is a financial metric widely used to measure the possibility of gaining a return from an investment based on its past performance. It is calculated by subtracting the cost of investment from the current value of investment, then dividing it by the cost of investment. The right investment choices to get a 10% return on investment ultimately depend on several factors.
Working through these calculations and investment choices can be complex, which is where a financial advisor can be particularly helpful.
What Is Your Return on Investment?
Return on investment, commonly known as ROI, measures the profitability of an investment relative to its cost. This financial metric helps you evaluate how efficiently your money is working for you. By calculating ROI, you can compare different investment opportunities and determine which ones provide the best value for your financial goals.
Calculating ROI involves determining the gain from your investment relative to the cost of your investment. Let’s simplify it with an example. Assume you invested $1,500 in a venture and later, it’s worth $1,650. Your ROI is then ($1,650 – $1,500) / $1,500 = 10%. Regularly tracking your ROI can be made easier with digital tools or even the assistance of a financial advisor. They serve crucial roles in assessing the efficiency of your investment and comparing the ROI against the ROI of other investments.
While the standard ROI formula provides useful information, it doesn’t account for important factors like time horizon or risk. An investment portfolio that delivers 20% over one year is typically more valuable than one delivering 20% over five years. Similarly, a lower-risk investment might be preferable to a higher-risk one with the same ROI.
How to Get a 10% Return on Investment (ROI)
Getting a 10% return on your money sounds great, but it depends a lot on what you invest in and what the market is doing.
The math behind ROI is simple—take what your investment is worth now, subtract what you originally paid, then divide that number by your original cost. But the timing matters too. Making 10% in one year is much different than making it over five years. Risk also plays a big role. Higher returns usually come with more risk, so it’s important to look at the full picture.
Some people try to hit that 10% mark by investing in stocks, real estate, or other high-growth opportunities. These can work, but they also come with ups and downs. Talking to a financial advisor can help you find a mix of investments that make sense for your goals. It’s also a good idea to check in regularly and make changes if needed—what works one year might not work the next.
Investments That Can Potentially Return 10% or More
Investing money wisely is a skill set that isn’t just reserved for Wall Street tycoons. With the right knowledge and strategies or the guidance of a skilled financial advisor, anyone can make strides to unlock their wealth potential and aim for a 10% return on investment. Nevertheless, it’s important to proceed with caution because past returns are not indicative of future results.
Stocks are a popular choice for many investors. For example, Apple’s stock has returned more than 898% over the past decade, even if it is a bit of a unicorn stock. Investment decisions like this should be based on one’s risk tolerance, considering all factors involved. Here are six investments that have, cumulatively, returned 10% or more in the past:
1. Growth Stocks
Growth stocks represent companies expected to grow at an above-average rate compared to other companies. By investing in these companies, particularly in sectors like technology or biotechnology, you can benefit from significant capital appreciation as these companies expand and increase their market share. High-profile examples include companies like Amazon, Apple, or Tesla.
2. Real Estate
Real estate investments can generate substantial returns through both appreciation and income. Rental properties in growing markets may deliver combined returns exceeding 10% through rent payments and property value increases. Real estate investment trusts (REITs) offer a more accessible way to invest in property, with many historically providing dividend yields of 4-8% plus potential appreciation, potentially exceeding the 10% threshold.
3. Junk Bonds
Junk bonds are high-yield corporate bonds issued by companies with lower credit ratings. Because of their higher risk of default, they offer higher interest rates, potentially providing returns over 10%. During economic growth periods, the risk of default decreases, making junk bonds particularly attractive.
4. Index Funds and ETFs
Investing in index funds and ETFs that track high-growth sectors or emerging markets can yield higher returns. While traditional index funds like the S&P 500 might not always provide 10% returns, sector-specific or market-specific funds might offer higher growth potential, especially in bullish market conditions.
5. Options Trading
Options trading involves buying and selling options contracts, which can yield high returns if the underlying asset’s price moves favorably. Strategies like buying call options (betting that the asset’s price will rise) can provide substantial gains, though this requires careful market analysis and carries high risk.
6. Private Credit
Private credit involves lending directly to companies or individuals outside of traditional banking channels, often through private funds. These loans typically offer higher interest rates due to their illiquidity and risk profile. By carefully selecting borrowers and spreading risk across multiple loans, investors could achieve high returns.
7. Private Equity and Venture Capital
For accredited investors, private equity and venture capital investments offer potential for significantly higher returns. These investments involve providing capital to private companies with strong growth prospects. While extremely risky and illiquid, successful venture investments can generate returns of 20% or more annually when part of a well-managed portfolio that accounts for the inevitable failures.
8. Business Ownership
Starting or purchasing a business represents another path to potentially high returns. Small business investments can generate substantial profits when the enterprise succeeds, often exceeding 10% returns on initial capital. However, this approach requires a significant time commitment, specialized knowledge, and comfort with uncertainty.
Diversifying Your Portfolio to Reach a 10% Return
Diversification is a risk management strategy that encompasses a wide variety of investments within a portfolio to potentially achieve higher returns with lower risk. A diverse portfolio could consist of 30% in a mix of value and growth stocks, 30% in index funds, 20% in bonds, 10% in real estate and 10% in alternative investments like P2P lending or commodities. However, diversification can have nearly unlimited combinations to reach your goals.
The benefits of diversification come in the balance of catching nice returns when certain investments take off, while spreading your risk out as well. If one type of investment drops, your entire portfolio won’t take a hit and you’ll be able to take advantage of potential strong returns with other assets. This way if one asset is returning 15% but another drops to only a 2% return, it’s still possible for your entire portfolio to reach a steady 10%+ return.
Bottom Line
Investing is a financial strategy that can lead to substantial wealth if done correctly. Nevertheless, it’s not a guaranteed path to riches and it requires care, patience, regular reviews and possible adjustments over time. By understanding the concept of ROI, identifying potentially lucrative investment options, diversifying your portfolio and regularly checking your investments, it’s possible to unlock your wealth potential and strive for the return on investment you want. Making use of professional advice from financial advisors can be beneficial in achieving your desired returns as well.
Tips for Investing
- It can be difficult to find the right investments to meet your overall financial needs, especially if you’re not an experienced professional. With the help of a financial advisor, you can find the right balance in your portfolio to aim for a 10% return over time. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- You can use SmartAsset’s free asset allocation calculator to see what your portfolio might look like with your chosen risk profile.
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