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 just 4.53% annually.
What's more, each of these popular stocks is significantly down over the past five years:
|
Company |
Return since Sept. 2001 |
|---|---|
|
Ahold |
(60%) |
|
Electronic Data Systems |
(54%) |
|
Ford |
(39%) |
|
Marsh & McLennan
|
(23%) |
|
NTT DoCoMo |
(31%) |
|
Time Warner |
(41%) |
|
United Microelectronics |
(30%) |
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, the long-term treasuries pay about 4.9%. 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):
Institution | Rate | Conditions |
|---|---|---|
First Financial Federal Credit Union (MD) | 10% | 12-month CD. Maximum deposit is $1,000. Must open a checking account with direct deposit to qualify. Sign-ups conclude in October. |
I'll understand if you find these limitations, including the limited sign-up period, frustrating. But it's still an attractive rate. And more deals like this one crop up every month. It's worth watching for them, especially considering that as of this writing, the Vanguard 500 Index has returned just 6.95% 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.
Interested in more money-saving deals and tips? Consider taking our new personal finance newsletter service, Motley Fool GreenLight, 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. Just call him a Fool. Tim didn't own shares in any of the companies mentioned in this story at the time of publication. Check out all of his stock holdings at Tim's Fool profile. Time Warner is a Motley Fool Stock Advisor selection. The Motley Fool's disclosure policy always beats the market.
