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During my time as a financial adviser, I constantly found people going about investing, and building an investment strategy, from the wrong perspective. They would say things like, "I want to earn 15%," or "I think I can earn 15% on my own, can you get me better than that?" This is the wrong approach to investing money. It is important to understand where expected returns on an investment come from. The topic of determining expected returns can seem like voodoo and witchcraft if not properly studied, but the educated investor understands it. What institutional investors, viz. banks, Warren Buffet, Donal Trump, and the better Future Funds, do is they look at the risk of the investment and then decide if that investment's expected return compensates them for the additional risk. The 10-year Federal Treasury Bills (T-Bill) are risk-free investments because they only have one source of risk, inflation. If you purhcase a T-bill, there is a possibility that the CPI inflation will exceed the 10-year rate. As of the writing of this article, 19 December 2009, the T-bill rate is 3.546%. If the investor holds it for ten years, they will only receive 3.546% once a year until maturity. |
