Do you know how much you expect your portfolio to return annually? You should, because there's a decent chance you could earn double-digit gains without risking a dime. Really. Read on.
Real stock returns
Over the past five years, the Vanguard 500 Index (FUND: VFINX ) , a rough approximation of S&P's collection of 500 large-cap stocks that is often referred to as "the market," has returned just 2.37% annually.
What's more, each of these bellwethers actually lost money over the past five years:
- Oracle (Nasdaq: ORCL ) , down more than 15%
- Microsoft (Nasdaq: MSFT ) , down nearly 20%
- Intel (Nasdaq: INTC ) , down nearly 40%
The returns from stocks over short periods are simply not reliable.
Meet the risk-free rate
That's why expert stock-pickers always seek returns that are well above what's called the "risk-free rate." What's that? Here's how Investopedia defines it:
In theory, the risk-free rate is the minimum return an investor expects for any investment since he or she would not bear any risk unless the potential rate of return is greater than the risk-free rate.
In practice, however, the risk-free rate does not exist since even the safest investments carry a very small amount of risk. Thus, the interest rate on a three-month U.S. Treasury bill is often used as the risk-free rate.
Right now, the three-month T-bill pays an average yield of 4.965%, according to Bankrate. Experienced investors aim to beat this benchmark bloody with their selections. Motley Fool Hidden Gems co-advisor Tom Gardner buys small-cap stocks with the potential to return 20% annually, for example.
Risk-free double-digit returns?
That makes sense. Why aim low when the Fed will pay you nearly 5% to borrow? Or, better still, if your bank will pay 10% for the same privilege? No kidding. Here's a double-digit offer available right now (thanks to the highly useful Bank Deals blog):
Eagle Bank (MA)
12-month CD. Requires that you open a checking account with $10 and sign up for direct deposit. Maximum CD deposit is $1,000.
Despite the limitations on that rate, it's pretty attractive considering that as of this writing, the Vanguard 500 Index has returned just 2.67% during 2006.
Follow the money
The key to saving and investing successfully is to earn the best returns possible while keeping within your risk tolerance. So even if you're a dyed-in-the-wool stock jock, it doesn't make sense to ignore the rates your bank is offering. You may be passing up an easy 10% gain.
Fool contributor Tim Beyers hasn't had a cheeseburger in a while. Now he's craving one. Tim owns shares of Oracle but no other companies mentioned in this story. Check out all of his stock holdings at Tim's Fool profile. Microsoft and Intel are Motley Fool Inside Value recommendations. The Motley Fool has an ironclad disclosure policy.