Do Your Investments Pass the 5.45% Test? Here's How To Avoid Leaving Money On The Table

Imagine you're in a candy shop, and you have just enough money for one sweet treat.

The problem?

You're torn between a chocolate bar and a bag of gummy bears.

That's when the principle of opportunity cost comes into play — if you choose the chocolate bar, you're giving up the gummy bears, and vice versa.

Now, let's translate this to your financial life.

Every investment decision you make comes with its own opportunity cost.

By choosing one investment over another, you give up the potential returns of the one you passed over.

So, how do you make savvy choices?

That's where understanding risk/reward and hurdle rates comes into play.

Risk/reward is all about balance. It's about finding the sweet spot where the potential gains from an investment justify the risk you take. After all, not every high-reward investment is worth the risk.

Just think about:

• Crypto
• IPOs
• Venture capital
• Junk bonds
• Penny stocks

These assets tend to have a "get-rich-quick" appeal, which is why they're only a half-step away from gambling. Sure, they could skyrocket your portfolio. But they could just as easily cost you a big chunk of your hard-earned money.

And then, there is the concept of hurdle rates.

Hurdle rates are the minimum rate of return you expect from an investment to make it worthwhile.

Take crypto, for example.

Given how violently that market moves up and down, would investors take a chance on Bitcoin or Ethereum if they thought they would only make 8% or 9% per year?

No way!

They invest (and stomach that volatility) because they expect to see life-changing returns.

You see, the hurdle rate for crypto is much higher than the hurdle rate for stocks, which is much higher than the hurdle rate for bonds, and so on.

Again, this is because the risk always needs to justify the reward.

Okay okay, you get it.

But why does this all matter now?

Well, in today's climate, with short-term U.S. Treasuries paying 5.45% at ZERO risk, the game's rules have changed a bit. Hurdle rate has shifted upwards. Now, you need to scrutinize every position in your portfolio and ask yourself, "Can it beat 5.45%?"

Although that might feel like a low bar, a number of big-name equities haven't met the mark.This includes:

• JNJ
• ABBV
• MO
• SQ
• And dozens more!

Of course, you can't predict the future. You don't know for certain how any individual stocks or ETFs will perform over the next 12 months.

But if you are holding onto that languishing stock hoping to "make it all back" — think again.

It may be time to say goodbye and re-allocate that capital elsewhere. Somewhere with better investment metrics.

So the next time you make a trade, don't chase the highest returns blindly. Instead, answer these 3 questions:

• How likely is it that this investment will beat my hurdle rate?
• What additional risks am I taking on for that extra return?
• Is it worth it?

To be clear, you do not need to rush and sell all of your stocks. But the higher these risk-free rates climb, the more expensive it becomes to hold onto underperforming assets.

If an investment doesn't meet your expectations or align with your goals, perhaps it's time to let it go.