June 24, 2024
By: Travis Watts, Director of Investor Development
The Surprising Truth About High Yield Investments
Isn’t investing all about yield? Don’t you want the highest return on your money?
You might be surprised to learn that chasing high yield investments is not always the best strategy for long-term success. It took me many years to learn this, but now I want to share why a different approach can be more beneficial for long-term success.
A Unique Investment Approach
In my early years of investing, achieving 30%+ annualized returns on my investments was not uncommon. But today, I earn more money (in terms of dollars) despite having lower returns. This shift in strategy came after a mentor explained his unique approach to me.
My mentor, who sold a company and became a full-time investor in the 1990’s, allocates 40% of his portfolio today to assets producing 3-4% annual returns. Initially, his strategy to sideline high yield investments seemed like a poor choice to me. However, his rationale was based on his substantial net worth and risk tolerance.
Understanding the Math
At the time of our discussion, my mentor’s net worth was around $80 million. By investing 40% in low-risk, tax-free municipal bonds yielding 3-4%, he secures nearly $1,000,000 a year in passive income. He discovered how much is “enough” and doesn’t need to take high risks with this portion of his portfolio. Even if the remaining 60% of his portfolio went into failed deals, he could still live comfortably. This perspective on risk management was enlightening and led me to reassess my own investment strategy.
Moving Away from High Yield Investments
In my earlier years, I enjoyed the results that were achievable from high yield investments due to a rising market and an active real estate strategy. However, these strategies exposed me to significant risk in the event of downturns. As I matured, I began reducing risk, targeting lower yields of 6-10% annualized. While these yields are significantly lower than the early years of investing, my income has increased due to having a larger investment base.
Consider these scenarios:
- With $100,000 invested at 30%, you earn $30,000 annually.
- With $1,000,000 invested at 10%, you earn $100,000 annually.
The latter scenario illustrates how lower yields on a larger investment can generate more substantial income while taking on less risk.
Evaluating Your Risk Profile for Smarter Investment Decisions
- Risk Profile: Understand how much risk you are willing to take.
- Down Market Performance: Evaluate how your investments might perform during downturns.
- Defining “Enough”: Determine how much income is sufficient for your lifestyle needs.
For me, prioritizing consistent and stable income with a low-risk profile is more beneficial and sustainable over the long-term. This approach reduces the anxiety of market shifts, knowing these are inevitable. I encourage you to consider this philosophy and evaluate your current investing approach.
If you would like to learn more about investing in multifamily assets, or our current investment opportunities, schedule a call with Investor Relations today.
Find additional Passive Income Lifestyle episodes on the Ashcroft Capital YouTube channel.
As always, reach out with any questions. I’m happy to be a resource.
