How to Invest for an 8% Return

What's up you guys? It's Graham here. So, probably one of the most common critiques I get in my videos is it'll often assume and base my calculations off of an 8 percent return. And probably one of the most common comments that get in response to this is, "You can't possibly get 80% return! Where can you get an 8% return? That's very unrealistic!" Just like... and so... so this video is in response to that and where you can actually get an 8% return long term on average.

So let's get into this. Now, one very important distinction here that I want to make very clear is that there is no such thing as a guaranteed bulletproof, no matter what, consistent 8 percent return every single year. See, the thing is what we can base our returns off of long-term historical trends and use that as an educated guide. There is no such thing as a risk-free 8 percent return.

The other really important distinction here is that when we assume an 8 percent return, we're never going to assume a consistent 8 percent return. It's not like putting your money in a savings account where you can get like 1 percent annually no matter what happens consistently. It's more along the lines of maybe one year you're up sixteen percent and the next year you're flat and up 0 percent. Maybe you're up 24 percent the first year and then you're down at 8% the second year.

So when I refer to an 8% return, I'm talking about the long-term historic average. This could be over the period of 20 to 40 years. Short-term, it's going to be much more difficult to calculate and assume an 8% return. But let's try, and these are four investments that have historically performed about an 8% return, maybe plus or minus about 1%.

The first one is the S&P 500. Now, this is the Standard and Poor's market index in the top 500 publicly traded companies on the Nasdaq and New York Stock Exchange. This includes the likes of Apple, Microsoft, Exxon, Facebook, Amazon, and some other really heavy hitters. If we look at the historic average of the S&P 500, its return is about an 8% return adjusted for inflation, with dividends reinvested. Again, this is the long-term historic average.

There are some 15-year periods which have done significantly higher than an 8% return, for instance, from 1950 to 1965 during the post-war boom era. And then there are other 15-year time periods which have done significantly worse than that, for instance, from the year 2000 to 2015. We've seen an average of two and a half percent annually adjusted for inflation.

So the purpose of this is really just to have a wide perspective. You can't look at the short term, even in a period of 10 to 15 years, and expect to get a consistent 8% return annually. Short term, you can see variations as high as like a 30% loss annually or 30% gain annually. But overall, long-term historically, we've seen an average of about an 8% return.

And because everyone always appreciates really specific examples, I personally just draw all my extra money into an S&P 500 index fund through Vanguard, and the ticker symbol is VFIAX. Or maybe it's pronounced Phoenix. Or I don't know, but anyway, it's VFIAX. All I do is I buy it, I automatically reinvest dividends, and that's it. I basically just set it, forget it. It's done. That's it. Really easy. Vanguard.

Now, the second way you can get an 8% return, much like the first example, is through buying individual stocks. This one is significantly higher reward, but also significantly higher risk. Now, when you're trading individual stocks, I'd assume it to be much less passive than if you're just buying an index fund and forgetting about it, because it's gonna take time researching companies, making sure they're doing as well as you expect, and if they're not, adjusting your portfolio accordingly.

But doing this is also significantly riskier because you have fewer eggs in your basket, meaning that with the S&P 500 you're investing a small portion across 500 different companies. When you're investing in individual stocks, maybe you're only buying a few of those companies, so your returns could be much higher or much lower depending on how those individual stocks perform.

Now, personally for me, I don't feel comfortable investing in individual stocks. I'd rather just throw it in an index fund and forget about it. It takes very little time, but for those that don't mind putting in the work and doing the research, it could be much more lucrative depending on the stocks that you pick. For instance, Tesla is up 286 percent over the last five years; Amazon is up 65 percent in the last 12 months; and Snapchat is down 50 percent in the last 12 months. No surprise there!

If you end up picking winners, you can do really well, but if you end up picking losers, you can lose a significant amount of your money. Like all of my examples, with risk comes reward, and the two are directly correlated to one another. But honestly, I believe that achieving an 8% return long term with stocks, assuming you do the research and you put in the work, should be fairly achievable.

Now, the third way of investing to get an 8% return, and I'm sure many of you know this and it's no surprise: drum roll... but real estate! When you invest in real estate, your return is broken up into three categories. The first way of making money in real estate is called your cash-on-cash return. The second way you make money in real estate is by equity through paying down your loan. And the third way you make money in real estate is through appreciation.

Generally making an 8% to 10% return in real estate is fairly common, and some people can make significantly more than this depending on the area. As a round number example, let's say you buy a hundred thousand dollar home that's renting for $800 a month. You put twenty thousand dollars down on that house and you finance eighty thousand dollars over 30 years. Your total expense on that property, through your mortgage, property taxes, insurance, repairs, and everything else, is going to be about six hundred dollars per month.

This means that when you rent it for eight hundred, you profit the difference and your cash returns should be about two hundred dollars per month, or twenty-four hundred dollars per year on the twenty thousand dollars you put in. Because you made twenty-four hundred dollars with that, that works out to be a twelve percent return. That is the first way to make money.

But also, the second way is by building equity by paying down your loan. And in the first year, you've paid down your loan by fourteen hundred dollars, which works out to another seven percent return on your money. Now finally, the third way of making money in real estate is through appreciation.

Now let's say for the sake of this that it goes up two percent, which is basically just inflation. This means on a hundred thousand dollars, the second year, it's now worth a hundred and two thousand dollars. This means that you got an extra two thousand dollar return on the twenty thousand dollars you invested. This works out to an additional ten percent return on your money.

So in this example, if we just look at the cash-on-cash return, we're seeing a 12% return your first year, but if we also include paying down the loan, which is an additional 7% return, and appreciation, an additional 10% return, we're really looking at a 29% return your first year. So you can see that making an 8% to 10% return in real estate is fairly achievable.

However, when you invest in real estate, there's a much higher barrier to entry that usually requires more money down, a good credit score, having the income to support the loan, and also it takes a lot more work upfront to set up. So even though you're able to get higher returns, it does take more work to get those returns. And also, not all properties are gonna cash flow, so it takes time to identify the ones that do work.

But once you've done it a few times, you really know what to look for, and then it becomes like doing it on autopilot. You just do it without even thinking about it. So it's because of those reasons that I really like real estate, and with that, it's pretty easy to calculate an 8% to 10% return annually.

Now, the fourth way you can achieve an 8% return is through peer-to-peer lending websites such as Lending Club or Prosper. Now this isn't something I've personally done, but I know a lot of people who have, who have had a great experience getting about an 8% to 10% return. These websites allow you to loan money to people for as little as a few months to a few years for as low as $25 each.

So this means with $2,500, you could potentially spread out your loans over a hundred people at $25 each. Now inevitably, some of them will default, some of them won't pay back their loan, you'll lose on some of them. But you're plenty of others to make up the difference. It's really all about spreading your risk across as many different people as possible.

So far, these websites have seemed to be pretty successful, and some people have had some pretty good results from them, especially when they loan money to people who are high income, good credit, who just want to consolidate their debt. But we've yet to see how these websites do during the next recession. I'm sure returns like this will inevitably lower during economic turmoil, but you can't deny that some people have had some really great results with this so far and averaged about a 7% to 10% return.

Overall, in my opinion, it seems like a pretty good route to take for those that are willing to try it out. And then finally, I saved the best for last. My fifth way, my favorite way of getting 1% interest every single day... and it's BitConnect! Just kidding on that. But for real though, with the first four examples are how I come up and calculate my 8% returns.

And this isn't to say that there aren't many other options out there to get an 8% return. I'm sure some people will argue for cryptocurrency; personally, I just see that as being too risky to calculate over the long term. Some people might argue that you can put your money into a business and get a much higher return than 8%, and I don't doubt that whatsoever. There are many, many other options out there for those that want to get an 8% return, who don't mind putting in the work or being creative, including like buying public storage centers, or mobile home parks, or franchises, or other little things.

I mean, there's so many options out there if you want to put in the work to get an 8% or higher return. But, point being, if you're looking for an 8% return, these are the four examples that I base my calculations off of that I also find as being the most simple and the most reliable long term.

But the key to doing all of this is really to have a long-term outlook. In the short term, things could just be too volatile for us to accurately predict. But I think it's safe to say that based off long-term historical averages over decades, or as long as a hundred years, getting an 8% return on average can be fairly achievable. And that's why I base my returns off of that.

And like I mentioned, no one can really predict the future. Maybe we end up seeing a 10% return, or maybe we end up seeing a 3% return. But if we use the past as a guide, we can make somewhat reasonable predictions moving forward of what we can reasonably expect.

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Thank you again for watching, and until next time!