A lot of people are aiming to take advantage of today’s fantastic certificate of deposit (CD) rates. And why wouldn’t you want to earn a risk-free 5% on your money?
But one thing you should know is that today’s CD rates aren’t going to stick around forever. In fact, it’s possible CDs will be paying a lot less even a year from now. So while you could open a 5% CD today for some short-term passive income, on a long-term basis, here are two options that are likely to be far more lucrative.
1. An investment in an S&P 500 ETF
It’s easy to get excited about a 5% return from a CD. But you should know that the stock market’s average annual return over the past 50 years is 10%. So investing in the broad market could earn you a lot more passive income than a series of CDs. Especially given that today’s CD rates aren’t the norm.
A good way to invest in the broad market is to load your brokerage account with shares of an S&P 500 ETF. ETFs, or exchange-traded funds, allow you to own a bunch of different stocks with a single investment. If you opt for an S&P 500 ETF, it will allow you to put your money into the S&P 500 index itself. This consists of roughly the 500 largest publicly traded companies today.
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Let’s say you have $1,000 to invest in an S&P 500 ETF. If you leave that money alone for 30 years and are able to score an annual 10% return during that time, you’re looking at growing your portfolio to almost $17,500.
2. A portfolio of hand-picked stocks
We just learned that the stock market’s average annual return over the past 50 years is 10%. But you might do even better with a strategically assembled portfolio of stocks.
To be clear, this approach to earning passive income can be riskier than investing in the broad market. You’ll need to research your stocks individually and keep tabs on them.
Over time, the value of different investments can rise and fall. So with individual stocks, you may have to rebalance your portfolio on a regular basis. A strategy that centers on an S&P 500 ETF won’t require the same amount of work.
But let’s say you decide to delve into the world of picking stocks and are able to earn a 12% return in your portfolio. After 30 years, your $1,000 could grow to almost $30,000. That’s a huge difference from the $17,500 above.
If you’re going to buy individual stocks, make sure you’re diversifying your holdings. As a starting point, aim for about 20 stocks across at least five different segments of the market (tech, banks, retail, energy, and so forth).
There’s nothing wrong with earning some short-term passive income from a CD. But an even better bet is to set yourself up with a larger amount of passive income over the long term. To that end, it pays to invest your money using one of the strategies above.
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