Investing Decisions: The Risk-free Alternative

September 06, 2023

Let’s start with the idea that your money is always invested SOMEWHERE. Whether that is in your checking account, stocks, bonds, or your mattress, you’ve made a choice to put your money somewhere and it’s either working for you to gain interest or it’s sitting close by, easily accessible for immediate needs.

We make choices. Do we want our money to earn interest? Do we want to put it at risk in order to potentially make more interest? Do we want it safe? When do we want it accessible?

Between 2012 and 2021, the rate on the 2-year U.S. Treasury has hovered between .20% and 2.96% (Federal Reserve- St. Louis, 2023). Inflation was also extraordinarily low, with the Consumer Price Index spending the vast majority of the time under 3% (Bureau of Labor Statistics, 2023). For most of that time, however, the CPI was higher than the treasury rate. The effect of that is most investments that provided a high level of safety also earned less than inflation. The price of protecting your wealth was the loss of real purchasing power over time.

In the last 2 years the landscape of the fixed-interest world has changed dramatically. The Consumer Price Index has been as high as 9.1% (Bureau of Labor Statistics, 2023) and the 2-year Treasury has touched 5% (Federal Reserve-St. Louis, 2023).

Circle back to what we are here for, which is the risk-free rate of return. While that term is a little misleading, it generally refers to the U.S. Treasury of some duration (3-month, 2-year, 10-year, etc…) minus the rate of inflation. Basically, how much can you earn on a U.S. Government bond and how much damage does inflation do to those earnings?

Many investors have flocked to money market instruments in the last 18 months as rates have risen dramatically. Money market fund assets have grown by more than $925 billion in 2023 alone (Pound, 2023). Low-risk options now earn a higher return than they have in 20 years. Until recently, though, inflation was running so hot that there was still a significant gap between what you could earn and the damage done by rising prices. Enter 2023. According to the CPI data, inflation has dropped dramatically. After peaking in June 2022 at 9.1%, the index has dropped to 3.2% in July of this year (Bureau of Labor Stastics, 2023). The yield on the Treasury has managed to hold strong, currently pushing 5% (Federal Reserve-St. Louis, 2023).

We are in a unique environment. If fixed interest vehicles and low-risk options can continue to earn interest as they currently are and inflation continues to to cool off, investing in these vehicles have potential to earn significant returns for investors. The CPI has fallen below the 2-year Treasury rate, meaning an investor can obtain a relatively safe investment and add real spending power into the future.

Many other investments have followed suit. Fixed annuities, CD’s, and the aforementioned money market options have all become attractive options for investors looking for return without taking a lot of risk with their funds.

What does this mean for you? It means that if your financial profile and time horizon fit the bill, investing in safer investments have potential to provide you with suitable returns, even after adjusting for today’s inflation. That’s not been a common occurrence in the last two decades. You may be able to reduce your exposure to higher-risk investments and still earn a return that works toward meeting your needs.

As always, this and many other useful articles can be found on our website at Feel free to browse all our content and reach out for individualized advice that fits your particular situation.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.