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In business, the “iceberg analogy” means customers see a small fragment of what’s happening above the water, versus the bigger, more complicated picture beneath the surface.READ THE ARTICLE
Intentional focus: In the literary world, this same technique was leveraged by author Ernest Hemingway, who, unlike long-form writer William Faulkner, followed the “less is more” mantra. In the realm of investment concepts, you might also wonder: How much of the iceberg do you really need to pay attention to? Looking at today’s financial markets, “risk-free rate” is one of the easiest, most observable aspects to watch above the waterline.
What’s the cost? As stated here, the risk-free rate is “a very narrowly defined opportunity cost, and is the same for everyone.” Simply put, it “measures the riskless opportunity cost of a purchase or investment”, and can act as a benchmark for any purchase you make, in relation to your holding period. That being said, today’s risk-free rate is universal: 3.07 percent for one year. It is “the yield on a U.S. treasury bill of the same maturity as your investment horizon.”
Mind the rate: A year ago, the risk-free rate was 0.07 percent, making today’s current rate 4,386 percent higher. Utilizing this information to help make decisions regarding your investments can be the reminder you need that there’s always an alternate option. For example, that could mean asking yourself, “Should I own stocks or corporate bonds (and their accompanying risks) given that I could instead invest with zero-risk, and guarantee myself 3.07%?” By making it a point to pursue yields at the risk-free rate, you can help elevate your overall purchasing power.
Know your risk: You should be paying more attention to the risk-free rate today. In doing so, you may find the stock market is no longer providing the return differential to justify the level of risk you may have been taking over the last few years.