Wondering what brokerage account rate of return vs traditional investments you can expect to get?
Unfortunately there’s no clear cut answer to this question. Unlike other forms of investment such as bonds or an ISA, a brokerage account does not guarantee a fixed rate of return.
The value of your brokerage account will depend on the value of the investments that you hold in it, and these will rise and fall with the market.
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Though the rate of return cannot be guaranteed, you can certainly exercise considerable control over it with the investment decisions that you make. Let’s take a brief look at some of the key factors that will affect the rate of return for brokerage accounts:
Volatility
One key measure that is used by financial professionals is the volatility of returns. In simple terms, this means how much the returns fluctuate over time, or how much up and down movement the balance of your brokerage account would have to endure in order to get from A to B. Lower volatility is certainly preferable, and volatility is often used as a proxy for risk when assessing financial securities.
Leverage
Except in very specific circumstances, leverage tends to increase the volatility of the rate of return on brokerage accounts. Leverage means using money borrowed from your broker in order to subsidize your investments. While this can increase returns it can also increase risk. Some products are inherently leverages, such as Futures and Options, while others can be leveraged through arrangement with your broker. Forex can often be leveraged 500:1, whereas the maximum leverage that is permissible for stocks is a much more conservative 2:2.
Market
The type of market that you chose to trade will have a significant impact on the rate of return you receive. Some markets are far more volatile and risky than others because they tend to move around a lot more. Commodities and forex are typically highly volatile, stocks and equity indexes moderately so, and bonds and other interest rate products less volatile still. Although investing in more volatile markets can increase your brokerage account rate of return, it can also lead to greater losses.
Diversification
Holding numerous, uncorrelated assets in your brokerage account has been shown to reduce risk and increase returns. You can read more about this and learn how to use it to increase the returns for your portfolio in our full length guide to diversification.
A Rate of Return That Works For You…
Finding a brokerage account with a rate of return that is right for you and your financial goals is about putting together the four things that we have discussed above. Although a brokerage account can offer a higher return than many other traditional forms of investment, you should only ever trade with money that you can afford to risk, and the money you place in an account with a broker should only ever form a small part of you investment portfolio.