High return market investments are a bit sparse these days
Market landscape for outsize reward investments
In 2021, the market is once again a strange place. Meme stocks dominate the headlines, the fed is printing money like a child in a room full of buttons he shouldn’t press, and all news is seemingly good news. After the COVID crash of 2020, everyone is on edge, and institutional hedging remains elevated. Risk feels high, but is it? Where can you find high return investments without risking too much? It’s a tough question to answer, so here are a few ideas, but first…
What do you want to do with your money?
We’ve found that the answer to this question varies greatly from person to person, and even business to business. If you are seeking high investment returns, what are you going to do once you get them? Are you seeking high yield for retirement? Seeking high return low risk for rapid and safe returns? Regardless of your methods, you need to ask yourself what you’re going to do with the money and when you need it. If you have a long time horizon, you can afford to take less risk to achieve high returns on your investments. If you need the money sooner, you’ll have to take more risk. Whatever your use is going to be, focus on earning it first, spending it later. Focus on spending it now, and you’re likely to be too aggressive with your investments.
The Rule of 72
What is the rule of 72? The rule of 72 states that dividing 72 by your investment returns, you will have an approximate length of time to double your investment. For example, in a high yield investment, you might manage a 26% annual return (nice!). 72/26 = 2.76. At that rate of return, you should expect to double your money every 2.76 years. Most people assume that it would take 100% return to double an account over the course of a year, but due to the magic of compounding, it only takes ~72%. Granted, getting a 72% annualized return is extraordinarily difficult. You’ll need to be levered or trading extremely frequently. The best hedge funds tend to average around 20-25% per year. For context, many real estate investments earn around 15% annually. Though risk and reward are closely linked, there are some ways to achieve safe investment high returns.
How to choose the right investments
Choosing the right investments plays perhaps the biggest role in achieving a high return investment. Too safe, and your return will be quite low but stable. Too risky, and your returns could be higher, but the risk of loss is greater. The trick is balancing risk with reward and looking for edge in markets to grant additional alpha (return over a benchmark). For example, high yield bonds tend to have a high return and a guarantee of payment, but the company itself may be in danger of insolvency (bankruptcy), at which point, the income goes away, and your investment is shot.
Four (Okay, three) Low-Risk Investment examples
In order to find safe investments with high returns in 2021, you really have to dig and research. Since most high return investments tend to be on the risky side, you’ll need to look into a few different overlooked areas in the marketplace in order to find safe investment with high returns.
- One place to look is in the value stock area. A value stock is a company that is intrinsically worth more than the market is claiming. For instance, a company might have assets or inventory that totals $100mm, but the market cap (total outstanding stock) is only $80mm. In essence, you’d be buying assets at 80 cents on the dollar. The assumption is that the market will eventually come to realize the value of the company and reprice it. Value stock investing has been out of vogue since 2009, but there are still good deals to be had, especially in the micro-cap arena.
- Another example would be a closed-end fund (also known as a CEF). These funds are similar to a mutual fund in that the fund owns many different stocks, bonds, etc. and often trade at a discount to the value of the holdings. In this way, an investor could again, buy an asset at less than what it’s currently worth. These require heavy research though, as many of them are not managed well. PIMCO is a heavy player in this arena.
- A third example would be an annuity. While we don’t recommend annuities, they are a relatively low risk option for yield hungry investors, almost exclusively retirees. An annuity offers a fixed payment over a certain period of time (usually the life of the holder) in exchange for a lump sum up front.
- Once upon a time, there were such things as high-yield savings accounts. These have mostly gone by the wayside as interest rates have gone to zero post-2008. It seems the fed cannot increase interest rates without causing extreme collateral damage, so the days of high-yield savings accounts are largely gone. Let us have a moment of silence for the days of 16% return for almost no risk.
Three medium risk investment examples
In the middle of the mix, you have have medium risk investments. These offer increased opportunity for return, but often not high returns. Here are a few examples of medium risk investment ideas:
- One example of a medium risk investment is the high yield bond. These are a commonly used investment vehicle for many investors. They offer a large premium over investment-grade bonds. At present, 6-10% annual return isn’t uncommon in the high-yield bond world. High yield bond investing requires research to avoid companies in danger of default, so beware of blind-buying for yield.
- Another very common example would be real estate investment. Many investors flock to real estate investment as a source of consistent income since most real estate investment deals involve renters (whether commercial or residential) paying a stream of high yield income. The risks are higher than normal, however. Defaults, turnover, disaster, etc. can put the brakes on the income stream AND leave a large liability behind.
- A third example, and definitely the most common, is the stock market itself. Index investing has never been more popular. By parking money in the S&P 500, you can (usually) achieve a modest rate of return with a modest amount of risk. 6-8% annually is about the historical norm, with tremendous variance.
Four investment ideas with high returns
There are many high risk investments available in all asset classes. An investor could buy gold, priceless oil paintings, boats, land, and many other high risk high reward items. But as with all things, there is a counter balance. High risk, high reward. Here are a few of the more common high risk, high return opportunities:
- One of the most common examples of a high-risk investment is the classic hedge fund. A hedge fund is surprisingly similar to a mutual fund except that it creates its own investment mandate, meaning it can trade and invest in whatever it chooses, as long as it tells the investors. Many consider a hedge fund to be the best high return investment, as they tend to be somewhat liquid and offer exposure to other markets that mutual funds don’t.
- A second example of a vehicle that can offer high investment returns (although “high investment returns” is a bit of a stretch here, as this is more of a trading product) would be levered and inverse ETFs. These ETFs offer a way to get “short” the market, or bet on a downturn or correction. Some offer leverage, sometimes doubling or tripling the day’s returns. Because of rebalance decay and percentage mechanics, these are best suited for very short term trading rather than thinking of them as high yield investments.
- A third example, especially in recent days (as of the time of this article) is crypto currency. The new kid on the block in terms of high risk high return investments, crypto offers boom-or-bust opportunity. It’s effectively a gold rush without the actual gold. Investors are flocking to speculate on the latest and greatest coins and tokens, hoping to cash in on an early contender for market share.
- High growth (and momentum) stocks are likely the most common and most familiar high risk high return investment options. They are highly liquid with a robust secondary market (the equity/stock market), they have very high return potential (upwards of 50-100% annual returns aren’t that uncommon), and they are accessible to everyone since they are publicly traded.
Investing in Options
One of the slightly less common, but extremely high yield investments is an investment in options. Many people have heard of options but have either heard horror stories or just think that options are too risky and complex. The fact is, you have already bought (and continue to buy) many options in your life. Every form of insurance is an option.
At our firm, one of the most common ways we attempt to create high investment returns for our clients is via options investment and active options trading. If done properly with solid risk management and clear objectives in place, investing in options can be a great way to add alpha to any portfolio. In fact, we think that options are the best high return investment for the money and risk. Consider your insurance company. Every day you don’t get in an accident or die, the company earns a profit, which it can then reinvest. Wouldn’t it be nice to be the insurance company for a change? When we sell options, we act like an insurance company, taking in a “risk premium” (i.e. monthly insurance payment) in exchange for the risk. We buy reinsurance (hedging) to help defray some of our risk in the marketplace. By properly and aggressively managing risk, we attempt to achieve a low risk high return. Oxymoron? We think not.
By mixing option selling, short-term swing trading, and even intraday scalping, we attempt to earn our clients a significantly higher than market rate of return. We aim to keep drawdowns to a minimum (Warren Buffet’s rule number one is “don’t lose money” and rule number two is “see rule number 1”)
Frequently Asked Questions
What is “yield” and what is considered “high yield?”
Yield is the amount that your investment pays you on a regular basis. It’s not how much your investment appreciates. In high yield bonds for example, the bond pays an interest rate to you, which is deposited every month into your account, regardless of the value of the bond and how much that value may have changed since buying it. This is the “yield.” If you’d like more information about high yield bonds, please contact us or set up a call and we will walk you through the basics and help you get started investing in high yield bonds if it makes sense for your needs. If there are other high yield investments that are more suitable, we can discuss those as well.
How do I get involved in real estate investment?
There are many ways to get involved with real estate investment:
- Buying real estate outright and either managing the tenants and upkeep yourself, or paying a management company to do it for you.
- Buying into a real-estate collective which will handle the management and purchase of the real-estate. You help fund the investment and receive a portion of the revenue stream
- Buying REITs (Real estate investment trusts) will offer an income stream in the form of a dividend. REITs must pay out an extremely high portion of their earnings as dividends, so it’s a nice choice for those looking for a real estate investment with a steady income stream attached.
What is the best high return investment?
Ask six different people, and you’ll get nine different answers as to what is the best high return investment. Many will tell you it’s a hedge fund. Many will tell you that it’s real estate. Others will tell you it’s bitcoin, and others will tell you it’s quality time with your kids. The truth is, what’s best for one person isn’t necessarily best for another. In our opinion, the best high return low risk investment is option selling. There is risk, but as long as an investor doesn’t overlever, take unnecessary risks, and hedge the portfolio, we believe it’s the best high return low risk investment to generate high yield returns.
If you’re interested in discussing your options (pardon the pun) for investing with us, please contact us or schedule a call with us so we can answer any questions you have and help you set up an account with us.
Have more questions? Contact us!