Think Equity Investing Can’t Be Risk Free? Think Again

Core Viewpoint - The article discusses strategies to achieve stock market upside with minimal risk through a combination of Treasury Bonds and stock index funds, emphasizing low fees and high tax efficiency. Group 1: Investment Strategy - A zero-coupon Treasury bond can be purchased to ensure a risk-free return, with a current yield of 5.09% for a 20-year bond, allowing an investment of approximately $37,049 to mature at $100,000 [2] - The remaining funds, about $62,951, can be allocated to a diversified stock index fund, resulting in a portfolio allocation of 63% equities and 37% fixed income [2] - Even in a scenario where the stock market experiences a catastrophic loss, the investor would still recover the original investment of $100,000, highlighting the safety of this strategy [3] Group 2: Portfolio Performance - The article presents a chart showing that even with a 10% annual loss in stocks, the overall portfolio can still yield a positive return, while an 8% annualized stock return results in a total portfolio return of 7.1% annually [3] - A 12% annual return from stocks can lead to double-digit returns without risk, making this strategy potentially lucrative compared to the Vanguard Total Stock Index Fund's 10-year annualized return of 14.36% [3] Group 3: Inflation Considerations - The nominal risk-free return does not guarantee a real positive return after accounting for inflation, as a zero return in stocks could lead to a negative real return if inflation exceeds 2.5% [4] - Treasury Inflation Protected Securities (TIPS) can be utilized to hedge against inflation, with a 20-year TIPS yielding 2.57% plus inflation, allowing for an investment of $60,235 to mature at an inflation-adjusted $100,000 [5]