How much do you need to invest to make US$100K a year?

Drawing a six-figure salary is everyone’s dream. But some people are more ambitious. They want a six-figure return on their investments alone.

A six-figure return on investments is pretty much possible. It depends on a single question: how much is the return that asset class is generating? The amount needed to invest to rake in a six-figure income every year, has an inverse relationship return associated with that asset class. The lesser the return generated, the more the investment needed.

Yet, there is another facet that can be added. In market analysis, usually behavioural science has long been ignored. However, the biggest driver of the markets, historically, has been the behaviour of the investor. And the same comes into picture here as well. Risk averseness, which is a very personal kind of trait in an investor, is inversely related to the investment needed to generate six-figure returns.

The greater the risk, the greater the returns. One of the most high-return debt instruments in any market are junk bonds (the ones that have been D-rated). But with high returns, there is a very high probability that the money would be lost.

The best example of how risk hits you hard is – India’s Franklin Templeton debt fund fiasco last year. The fund manager was forced to close six of its high-risk, high-return schemes as redemption from the investors surged. The investors have, till now partially been given back that money – the last tranche of which is not expected before the middle of this decade.

With those things in mind, let us look at some low and high-risk asset classes to see how an investor can draw six-figure returns in a year.

  1. Stocks: For the longest period in the history, the stock markets have been considered as an avenue of generating returns. So, how much return does a stock market give you? According to global investment bank Goldman Sachs, the average 10-year stock market returns have stood at 9.2% in the past 140 years. However, in the past decade, the banking behemoth states that the S&P 500 has done tad better than the historic 10-year average, with an annual average return of 13.6% during the decade. In 2020, even as the stock markets seemed to be on steroids, yet the annual returns provided by the S&P500 was still at 15.52% only. You might ask why? Because, before liquidity induced the buying mania in the stocks, there was a massive bear run in the markets. But getting back to our topic with returns ranging from 9.2% to 15.52% on stock investments, it is necessary to note that to generate a return of US$100,000 a year on your investment, you will have to invest somewhere between US$600,000 and US$1 million.
  2. Government Bonds: Government bonds are considered as the safest form of investment across the globe. Considered as safe haven, you will see government bond yields surge in times of uncertainty, as investors scramble to safety. This is because a government bond carries a sovereign guarantee. However, with this safety, comes the issue of low returns. As on date, the average global 52-week return on bonds stands at 3.75%. Given the low return on bonds, you would need anywhere between US$2 million to US$10 million (depending on the country) to generate US$100,000 returns in a year. In case of the US, where the aggregate government bond yield stands at negative (-)0.07%, you would need somewhere around US$143 million to generate the return of US$100,000.
  3. Cryptocurrency: Now, this is a volatile and risky territory for investors. Imagine this: in 2017, the world’s largest cryptocurrency Bitcoin gave an annual return of 1318%. This would mean that that you would have needed just US$7,587 to generate annual returns of US$100,000 in a year. Immediately next year, in 2018, had you invested in it, you would have probably faced financial issues as the returns stood at a negative 72.6%. Similarly, this year, Dogecoin, a meme-turned cryptocurrency, has given a return of 7,180.69%. If this trend continues, which seems to be the case, you will just need US$1,392 to generate returns of US$100,000 in a year.
  4. Angel Investment: The data shows that angel investment gives 2.5x return on the money they risk with the start-ups. However, there is no specific time-period to it. For that purpose, you would need somewhere between US$60,000 to US$70,000 to be invested to generate a return of US$100,000 a year.

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