In pursuit of the risk-free rate of return
Interest rates have risen dramatically during the past two years. Higher rates have, of course, increased borrowing costs, but higher rates have also increased the return on low-risk investments, such as money market and short-term U.S. Treasuries. With U.S. Treasuries paying 5% or more with little to no risk, they become a viable alternative to higher risk investments. In this article, we’ll explore the concept of the risk-free rate of return and why it’s important to consider what a low-risk investment can offer before allocating time and resources toward a high-risk investment.
The risk-free rate of return is a theoretical benchmark based on the yield an investor can earn from an investment that has the lowest risk possible. While it’s impossible to eliminate 100% of risk in any investment, many investors around the world consider U.S. Treasuries to be the most dependable and stable investment that is widely available today. The U.S. Treasury issues bills, notes, and bonds as a means of borrowing money from the public to fund the government’s capital projects. The U.S. government’s historic ability to tax and print money effectively, provides assurance that U.S. Treasuries have an extremely low risk of default. If they ever do, there likely will be larger issues that investors will have to deal with.
Understanding the risk-free rate of return and the benefits of U.S. Treasuries is crucial for small-business owners. These financial tools offer a blend of security, predictability, and efficiency, making them a valuable component of a well-rounded financial strategy. By incorporating them into their financial planning, small-business owners can mitigate risks, manage cash flow more effectively, and dedicate more time to growing their businesses.
, CFP, founded Cedarstone Advisors in 2014 after more than two decades in the finance and accounting industry. Steve set out to build a firm centered on the client because he realized that good financial decisions begin with understanding a client’s entire story. He began his career as a Certified Public Accountant with Deloitte in Los Angeles and later spent several years in corporate finance. Cedarstone currently has more than $150 million in assets under management.
Sunil Lad, IAR, CHA, has worked in the hospitality industry for more than 17 years and currently operates limited-service hotels in California. He is registered with FINRA and works with Cedarstone Advisors to help clients maximize yield for their hotel reserve accounts. He can be reached at [email protected].
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