Investment Options and Potential Returns on $500,000

Whether you’re planning aspirationally or have worked hard and saved well, it’s always worth making smart plans with your money. If you have $500,000 to invest, it’s worth putting that money to work for yourself. So, using SmartAsset’s investment calculator, we ran the numbers. Here’s what you might expect to get from some of the best investments you could make with half a million dollars. For more help getting the most out of your money, consider working with a financial advisor.

A Good S&P 500 Index Fund

Average Rate of Return: Over the past 10 years the S&P 500 has had an average rate of return of around 10%, historically.

Total Portfolio After 10 Years: $1.296 Million (a gain of nearly $800k)

Active investors, defined as people who trade individual assets to beat the market, underperform the market on an overwhelming 9-to-1 ratio. This means that if you go out and buy individual assets, nine times out of 10 you will make less money than if you had simply invested in the market itself and held on for an equivalent length of time. The market, usually defined by either the S&P 500 or the Dow Jones Industrial Average, has historically outperformed almost every other asset over the long run.

Just as one example, real estate prices nearly doubled between 2010 and 2022. As we’ll discuss later, this makes real estate one of the best assets you can buy. However, the S&P 500 has nearly quadrupled in that same period, jumping from around 1,300 points in 2012 to more than 4,500 at the time of writing.

It may not be the most exciting option, but the numbers don’t lie. A good index fund is one of the best investments you can make. Period.

Private Equity or Hedge Funds

Average Rate of Return: This is more difficult to calculate because by their nature private equity firms and hedge don’t always report their losses and earnings. However, most estimates suggest that you can expect average returns of up to 14%.

Total Portfolio After 10 Years: $1.85 Million (a gain of $1.35 million)

If you have $500,000 to invest, there is a good chance that you meet the criteria for an “accredited investor.” The SEC defines this as an investor whose annual income exceeds $200,000 Single/$300,000 Joint; who has more than $1 million in household assets; or who holds a position that indicates sophisticated market knowledge (for example if you’re an officer with an investment bank).

Many higher-risk assets are restricted to accredited investors because the SEC considers them to be more insulated from those risks. If you’re an accredited investor, you’re more likely to know what you’re getting into or at least have enough money that you can handle losses.

For those investors, private equity firms and hedge funds offer the potential for significant gains. These companies invest in assets outside of the traditional market, like startups, loan origination and real estate. They can post average returns of around 12% to 14%, making them potentially strong investments for high-net-worth households. (While currently, this is equivalent to investing in the stock market, historically this has beaten S&P 500 returns by between five and seven points.)

Just remember: These assets are restricted for a reason. These potentially outstanding gains come with the potential for real loss. Invest accordingly.

Individual Businesses

Average Rate of Return: We can’t really give you hard numbers on this one. Investing in a new business can post high returns or high losses. It depends entirely on the individual business. Estimates on successful startup investments can range as high as an annual 40% rate of return, but we can’t quote or source this with any confidence.

Total Portfolio After 10 Years: This one depends on the individual investment.

Climbing the ladder of risk vs. reward, we’ll get to potentially the riskiest but potentially the most rewarding option on offer: individual startups.

Investing in an individual business can take many forms. Many investors do this based on relationships. They have money to invest, so they look for people with an idea who they can trust and believe in. Often that connection comes from someone’s personal or professional network. Other investors find new businesses through third-party networks, they have firms or brokers who help them find startups to buy into.

In either case, investing in a new business generally means buying equity in this new company. You give them your money in exchange for an ownership stake, or at least a pledged percentage of future profits. If the company does well, this can be by far the most rewarding investment on the market today. If it does not, this can lead to some of the most comprehensive losses on the market.

Not for the faint of heart, investing in entrepreneurs is a great way to take a big swing.

Real Estate

Average Rate of Return: We can calculate this in two ways. The Dow Jones U.S. Real Estate Index tracks the performance of real estate-related securities, such as REITs. This is the return you can expect from investing in the sector as a whole, and it has posted an annualized average return of 5.65% over the past 10 years. You can also calculate this using average property and home prices. This is the return you can expect if you simply buy a property and sell it later. According to the Federal Reserve, the average sale prices of homes in the U.S. have increased by 84% over the past 10 years.

Total Portfolio After 10 Years: If you invest in REITs and other securitized assets, given the index average of 5.65%, you should expect a portfolio worth $866,293. If you buy a house, hold it and sell it, you should expect a portfolio worth $920,000.

Finally, perhaps the most popular high-dollar investment asset is real estate.

Real estate attracts highly liquid investors for two reasons. First, historically this has been a stable, strong growth asset. For millennial readers and younger this may be difficult to understand, but generations of investors lived by the rule that real estate prices do not go down. (This was part of the logic that drove the crisis of 2008.) If you wanted a place to park your money, see growth and never worry, you bought land.

Second, this is an asset class with a high barrier to entry. If you want to buy real estate, whether we’re talking undeveloped property or a Bay Area condo, you need substantial liquidity. If you are taking a loan, any lender will require significant up-front cash in the form of a down payment. Further, as an investment asset, the less you borrow the more money you can make. (Otherwise, the interest on that loan will erode your profits.) This means that you need a lot of money to get into this market at all, and a real lot of money to make it worthwhile.

The high liquidity requirement remains, as does the potential for growth. As we mentioned up top, in many areas around the country real estate prices have at least doubled over the past decade. This makes real estate a potentially strong investment for someone with significant liquidity on hand. As to whether it will hold that value … we’ll leave that judgment up to you.

Bottom Line

With $500,000 on hand, several investment options open up to you. Just a few of the strongest include a safe, but typically profitable, index fund, investing in or being an entrepreneur, buying real estate or seeking out hedge funds and private equity.

Investing Tips

Index funds are always a strong investment option, but at the time of writing, they were performing historically well. A 14% annual rate of growth is double what investors have historically gotten from their S&P 500 funds, making this a good time to look into that section of the market.
No matter how much money you have, it’s always smart to seek out sound advice. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.