Does a Risk-Free Return Actually Exist?

by Investing School on April 23, 2012

In an ideal world, and only in an ideal world, investing would involve no risks. You would select your funds, place your assets and watch them grow over time. You would have no concerns over losses. In reality, though, a risk-free return represents interest you would expect to earn upon your investment if said investment was completely risk free over a particular period of time.

Still not clear on the concept? The problem lies somewhere between theory and reality. If you could invest in something that was truly risk free, the return would be what you could expect for that outlay. Once the theory meets the real world a risk free investment doesn’t exist. No matter how safe an investment you pick there is always some level of risk. Treasury bonds are about as close as you can get to a truly risk-free investment as short term securities which have been issued by the government are so rarely defaulted upon.

While not truly risk free, the chances of a government defaulting over the short term is nearly unheard of. As a result, investments of this type are regarded as particularly safe. However, hyperinflation, which can be the result of specific economic forces, can lead to these things happening. Even if an investment appears extremely stable, there are no guarantees that it will remain so. This was the case in post-WWII Germany, where government issued bonds became valueless after the war ended. The current financial crisis in Europe certainly presents an argument on the side of uncertainty rather than on the side of an investment with a risk-free return.

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