Q: I have $100,000 and want to be a millionaire in a decade. What do I invest in? I've heard about gold, silver and stocks but have no idea where to start.
A: Trying to turn $100,000 into $1,000,000 in a decade is a tall order. And while it's good to have a sense of urgency about investing if it motivates you to get started, it's also important not to rush into mistakes. So let's start by considering what kind of return on investment you would need to make in order to reach this goal.
What is a realistic return on investment?
A decade is a fairly short period of time, so think about what it will take to grow your initial investment by a factor of ten in ten years. With no additional investment, turning $100K into 1 million would require a compound average annual return of 25.9 percent, which is pretty unrealistic. Historically, the U.S. stock market has averaged a return on investment of about 10 percent per year.
The best average return ever over a 10-year period was 20.1 percent, but there have also been ten-year periods in which the stock market has lost money. In fact, historically, the market has been more likely to lose money over ten-year periods than to earn a 20 percent annual return.
All of this means you are highly unlikely to meet your goal of being a millionaire in a decade unless you continue to earn and save money in addition to growing your investment portfolio. Depending on how much you save, you can then use a return-on-investment calculator to decide what you would need to invest in to meet your goals.
What to invest in to meet your goals
Even with additional savings, it sounds like your primary investment goal at this stage is growth. Since you are just beginning to learn how to invest money, here are some general investment goals and examples of investments that can be used to pursue those goals.
Stocks are shares in public companies that are traded through brokers on exchanges. Their value is determined by investor perception of their future earning potential. Stocks are subject to wide fluctuations in value, though you can mitigate this to some degree by assembling a diversified investment portfolio of many stocks.
Commodities are things like silver, gold, agricultural products and oil. They are traded on commodity exchanges and are even more volatile than stocks. A commodity investment generates no ongoing earnings -- its price is wholly determined by speculation about its future sale value.
- U.S. government bonds
These investments offer the security of interest payments and redemption values that are fully backed by the U.S. government. The downside is that this safety produces a limited return -- long-term U.S. bonds are currently yielding just 3 percent.
- Other bonds
Higher yields can be found in bonds issued by lower quality issuers than the U.S. government, including corporations, municipalities and foreign countries. Along with those higher yields comes a greater possibility of default.
- Personal-loans investing
Peer-to-peer lending has created a relatively new form of income investing in which you can invest by making personal loans. Higher risk loans produce higher income yields but are also more likely to default. You can manage your risk somewhat by choosing lower risk loans, focusing on shorter term loans and diversifying by funding small amounts of many different loans.
Personal-loans investing appears to have yielded returns that are higher than most bond yields but still in the single digits. Since this is a relatively new form of investment, the default risk has yet to be extensively invested through an economic recession.
- Savings and money market accounts
FDIC-insured deposit accounts offer you guaranteed safety for amounts up to $250,000 per institution, and full liquidity at any time. Yields are modest in most savings accounts and money market accounts, though there are now several banks paying in excess of 1 percent.
- Certificates of deposits
You can earn higher yields while still enjoying FDIC protection if you are willing to lock up your money in a CD for a period of months to a few years. Several 5-year CDs are now paying yields of around 3 percent.
The bottom line is that you almost certainly will have to add more savings to your investments to reach your goal of becoming a millionaire within a decade. As you invest toward that goal, remember that it is also important not to lose everything you have earned so far. To protect your investment portfolio as it grows, keep learning about investing and stay informed about developments in the economy.
More resources on how to invest money wisely:
Use our retirement savings calculator
Read our guide on how to start investing: 10 steps for getting started investing
Learn about another income alternative: Commercial paper for individual investors
Compare online brokers: Best online brokers