Rethinking Stock Market Investing: A Closer Look at Risk and Reward

In the world of investing, the stock market often steals the spotlight, promising potential riches and financial freedom. Yet, beneath the allure of stocks lies a lesser-known truth: the importance of benchmarking against US Treasury bonds.

While stocks can yield impressive returns, they come with inherent risks. On the other hand, US Treasury bonds, particularly the 10-year Treasury, offer a near-guaranteed return, with the only risk being the collapse of the US government. This risk-free return serves as a crucial benchmark for evaluating other investment opportunities.

Comparing the performance of the stock market, represented by the S&P500, with the risk-free return of the US Treasury reveals an interesting insight. Over the past two decades, while the S&P500 has seen average returns of 6.26%, the risk-free 10-year Treasury has offered 3.24%. This translates to a delta of merely 3.02%.

Inflation further diminishes the real returns of investments. With inflation eroding purchasing power, investments must outperform the inflation rate to generate meaningful returns. When considering this factor, the marginal delta between stock market returns and the risk-free rate becomes even more apparent.

In my opinion, a 3.02% delta isn’t enough upside for me to take on additional investing risk. Instead, I’d prefer to stay completely safe in a risk-free investment or explore alternatives like multifamily real estate or self-storage facilities. Historically, these avenues have offered returns ranging from 15% to 25%, excluding tax benefits.

While the stock market remains a viable investment option, it’s essential for investors to adopt a balanced approach. By understanding the significance of benchmarking against the risk-free return of US Treasury bonds and considering alternative investment avenues, investors can mitigate risk while maximizing returns.