When you invest, you're risking your money for profit. Savvy investing involves making the most profitable investments possible relative to your level of risk. For example, if you're looking for an almost risk-free investment with higher comparable returns, you could choose to invest in short-term Treasury notes instead of a bank savings account. For higher returns, though, you're probably going to have to make some tradeoffs.
Increasing Risk Level
Higher risk investments pay higher returns to compensate the investor. The fascinating thing about risk is that if you properly diversify your money, your actual risk of losing your money goes down over time. While any one company could be a big winner or a big loser, a riskier portfolio of investments goes up faster than a less risky one. It just goes up in fits and starts. However, a long time horizon helps to smooth out the curve.
Increasing Time Horizons
Within the same risk class, tying up your money for a longer period of time will pay you better returns. For example, as of the close of the financial markets on Friday, July 12, 2013, a five-year U.S. Treasury note had a 1.42 percent yield while the 12-month Treasury bill offered 0.11 percent and the 10-year note paid 2.58 percent. The investments were all the same and they were all backed by the U.S. government's credit, but the returns varied based on the length of the investment. The same rules apply to bank certificates of deposit. With this in mind, if you know that your money will be staying in the same place, choosing a longer-term investment vehicle can increase your returns.
Options and Other Derivatives
Another way to increase your returns is to invest in the market's movement instead of in the actual market. For instance, if you believe that shares in ABC Company will go from $40 to $50, you could buy 1,000 shares and make a $10,000 profit. Alternately, you could spend the same $40,000 to buy the right to buy shares of ABC Company for $40 per share. While the company is trading for $40, the option will be very inexpensive, so you can buy thousands of shares work. When the stock goes to $50, the option will be worth around $10 a share, since you could use it to buy a $50 share of stock for $40. Options and other types of derivatives can be risky, but if you have enough experience and knowledge, they can be ways to earn high returns.
One overlooked way to increase your investment returns is to reduce your cost of investing. For example, transitioning from investing in mutual funds to buying exchange traded funds could reduce the fees you pay from around 1.5 percent to around 0.5 percent. Doing your investing in a tax-advantaged account or buying investments that are tax-free can also leave you with more money after you pay your taxes. Whether you're giving up at least 15 percent of your capital gains in tax or giving up 25 or more percent of your interest in income tax, recouping those taxes could easily add 200 to 300 basis points to your returns.
Some Higher Yield Investments
Some investments offer higher returns than comparable investments. For example, instead of buying a 30-year Treasury Bond at a 3.63 percent return, you could buy a 30-year Treasury Inflation Protected Security at 1.37 percent plus the rate of inflation, which has historically been well over the 2.34 percent spread. Instead of buying corporate bonds, you could buy preferred stock, which combines elements of a bond with elements of a stock. Dividend-yielding stock can give you higher returns than non-dividend-paying stock, because you get cash in addition to share appreciation, and investing in direct lending can also give you healthy returns for very manageable risk levels.
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