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, a rough approximation of the S&P's collection of 500 large-cap stocks that is often referred to as "the market," has returned nearly 8% annually.
Nevertheless, each of these large caps is down -- some significantly -- over the past five years:
|
Company |
Loss |
|---|---|
|
Nortel Networks |
(42.6%) |
|
Electronic Data Systems |
(45.4%) |
|
XL Capital |
(10.3%) |
|
Analog Devices |
(8.2%) |
|
Kraft |
(3.0%) |
Don't be too surprised; history proves that the returns from stocks over short periods are neither reliable nor consistent.
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, 10-year Treasuries pay close to 4.7%. 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 15% to 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):
|
Institution |
Rate |
Conditions |
|---|---|---|
|
Flagstar Bank |
10.00% |
Six-month CD. Minimum deposit of $500. Maximum deposit of $2,500. New customers must open an account with direct deposit. Existing customers must enroll in the Flagstar Loyalty Program. |
I'll understand if you find these restrictions, including the maximum deposit, frustrating. But it's still an attractive rate. And more deals like this one crop up every month. It's worth watching for them.
Follow the money
The key to making the most of your money is to earn the highest possible returns 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.
Interested in more money-saving deals and tips? Consider taking our personal finance newsletter service, Motley Fool Green Light, for a spin. Clicking here will get you 30 days of free access.
This article was originally published on July 24, 2006. It has been updated.
Fool contributor Tim Beyers digs saving money as much as he likes earning it. Tim didn't own shares in any of the companies mentioned in this article at the time of publication. All of his portfolio holdings can be found at Tim's Fool profile. His thoughts on personal finance, Foolishness, and investing in general may be found in his blog. Kraft is a Motley Fool Income Investor pick. The Motley Fool's disclosure policy always beats the market.
