The Potential you Can Achieve In Investments
Investment potential is directly tied to risk. The more risk you are willing to take, the more your investment can return. Of course, riskier investments can also loose money more easily.
Low risk investments can be expected to return just a bit more than inflation. Why is this important? Inflation is a basic measure of how much money looses value each year. If your investment only matches the inflation rate, you aren’t getting ahead, merely keeping up with the constant rise in prices as time goes by.
Savings accounts, Money Markets and Certificates of Deposit are all low risk, low return investments. You can expect to make very little over inflation with these, however, CD’s and savings account are so safe, they are insured up to $100,000 per account. Because the rate of return for these investments is so low, it could take decades to double the value of your investment.
Slightly more risky, but with greater return would be to invest in conservative mutual funds. There are literally thousands of types of mutual funds, and many of them invest in a mix of lower risk securities such as investment grade bonds and large stable stocks. Potential for gain is higher here, with many of these types of funds earning rates well above typical rates of inflation.
Many mutual funds can return 8% to 10% without a tremendous amount of risk. At a 10% return you can expect your investment to double in value in about seven (7) years. Not bad, but not that great either. Of course, remember that this comes with added risk – you could loose money in your investment, taking much longer than seven years to double the initial amount you put in.
Moving to more aggressive investments, you can look at riskier mutual funds. These funds will invest in more speculative markets – smaller start-up companies, higher risk bonds, and companies in emerging markets. The potential gains with these funds are significant, with many funds in these categories earning upwards of 25% – 50% annually. Of course, if the markets go down, your investment is going with it. At a return of 25% you can expect your investment to double in value in less than four (4) years. A 50% return, which is very very rare, can double your investment in about two years. This is very rare.
Investments with the most potential, and the most risk, are stocks from individual companies, especially smaller companies in highly volatile industries. The dot com boom and bust of the late 90’s and early 2000’s was a great example of this high potential, high risk investing. Some people doubled their money in a matter of days, others lost everything in the same amount of time.
Of course, there are stocks that are less risky than this. Large, well established companies are unlikely to loose all of their value overnight, but they aren’t going to grow as fast as the little guy either. Picking a good stock in the right growth industry can easily earn you upwards of 30% return annually, if you choose properly and are willing to take significant risk.