Interests rates are low, and five- to 10-year government bonds yield roughly 1.3%. With that kind of long-term time horizon, you can unlock greater potential for your hard-earned dollars by investing in stocks.
Higher returns can make a big difference
If you invest $5,500 in a Tax-Free Savings Account for 1.3% per year for five years, you would end up with almost $28,400, of which about $900 will be growth from your investments and $27,500 will be from your savings. The total returns of your investments would be about 3.3%.
If you instead invest $27,500 for 10% per year, you would end up with nearly $35,500, of which about $8,000 would be returns from your investments. The total returns of your investments would be about 29%. In other words, this growth would be 8.8 times the amount one would get from investing in long-term government bonds.
The longer the compounding, the bigger the difference
What happens when you invest $5,500 every year for 10 years with 1.3% annualized returns? You would end up with $58,700, of which about $3,700 would be growth from your investments. Your total returns would be about 6.7%.
If you instead invest an annualized return of 10%, you would end up with nearly $93,900, of which about $38,900 would be returns from your investments. Your total returns would be about 70%. In other words, this growth would be 10.5 times the amount one would get from investing in long-term government bonds.
What can get you 10% returns?
If you’re not comfortable with growth stocks, you can consider businesses that are backed by real assets. For example, Brookfield Property Partners LP (TSX:BPY.UN)(NYSE:BPY) owns a portfolio of quality real estate around the globe.
Its core portfolio is comprised of 269 best-in-class office and retail properties. Additionally, it also has opportunistic investments in multifamily, industrial, hospitality, triple net lease, self-storage, and student-housing assets for higher returns.
The units offer a 5.3% yield thanks to a strong greenback (the shares pay U.S.-denominated distributions). On top of that, management aims to grow its distribution by at 5-8% per year. So, that leads to an approximate annualized return of at least 10%, excluding any potential multiple expansions.
Government bonds offer low but guaranteed returns and promise the security of your principal.
Although stocks are riskier than bonds, stocks can unlock a greater potential for your invested dollars by delivering much higher returns in the long run. If you have a long-term horizon, you should consider sprinkling some high-growth stocks or quality dividend-growth stocks in your portfolio to build greater wealth over time.
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Fool contributor Kay Ng owns shares of Brookfield Property Partners. Tom Gardner owns shares of Shopify. The Motley Fool owns shares of Shopify and SHOPIFY INC. Shopify is a recommendation of Stock Advisor Canada.