In my last post I covered inflation, in this post I am going to show you what returns you should expect in different types of financial investments.

The historic return on various types of investment products

Debt Investment

What is bond?

Bond is an IOU. You loan money to the U.S. government, a state, a local municipality or a big company like General Motors.
When a bond is issued, the price you pay known as the face value of the bond. Mostly priced at $1000, the issuer of the bond promises to pay you back on a future day – maturity date at a predetermined rate of interest—coupon

Here is a simple example:

You buy a company XYZ Bond with a $1000 face value at 4% coupon and a 10-year maturity, for the next 10 years period you will be getting $40 per year from Company XYZ and you will get back your $1000 dollar investment in the end. So in the end of 10 year you will have $1400 in cash.

Below is the current interest rate of bonds

3-12 month US Treasuries at 0%

2 years US Treasuries at 1%

10/30 years US Treasuries at 3.04%

Investment grade corporate bonds at 1-4.51%

You can find more information about bonds here.

Real Estate investment return

I believe most of you know something about real estate investment, so I just going to give a brief example:

Let’s say you buy a house for $200,000 and rent it out for $600 per month for a year. In the 2nd year you sold it for $210,000. Here is how to calculate the returns on investment:
$7,200+$10,000=$17,200 profit then divide by $200,000 which is 8.6 % ROI
The return on real estate is around 8.6% per year for the past 20 some years

Equity Investment

Given that many stocks are in the stock market, so I am going to use the S&P 500 index for this research. I find that over the last 100 years the annualized return for the market is 9.67 % and 6.25% if adjusted with inflation. You can find more information on stock market return here.

what kind of investment products do you prefer?

If the inflation is 3.4% as of today, investing in bond is a very bad choice because it produces a negative return. In my opinion the best type of investment is equity investment because it out run inflation over the last 100 years. If I have to choose between real estate or equity investment I prefer equities. The return on investment in equities is higher compare to real estates. Stock market investment is highly liquid you can get in and out easily, and you can invest in stock for a small amount of money. In my opinion, stock market is the best investment on there.