We are independent & ad-supported. We may earn a commission for purchases made through our links.
Advertiser Disclosure
Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.
How We Make Money
We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently of our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.
Finance

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

What are Risk-Free Investments?

Jessica Ellis
By
Updated: May 17, 2024
Views: 4,731
Share

A risk-free investment is one in which the investor suffers no chance of losing money. Either through the return of capital or, ideally, capital plus interest, a risk-free investment guarantees that the investor will either break free or make money over the period of investment. The concept of risk free investments is more of a standard than a reality; even with the safest investment, there remains some chance of losing value, if not actual dollars. The most cautious investors may try to get as close to risk-free investing as possible, but this is not usually an attainable goal.

Some financial experts cite US Treasury bills, called t-bills, as the closest thing to risk-free investments. Backed by the promise of the United States government, t-bills advertise, and often provide, a safe chance of profit in return for loaning the government a certain amount of money for a set period of time. Investors buy t-bills at a discount rate, meaning that a bill worth $1000 US dollars (USD) could be purchased for $900. When the bill matures, the government pays the investor the full $1000 USD, giving him a profit of $100 USD.

While the mechanism for t-bills may be risk-free, the investment does actually carry some risk. One risk, though extremely remote, is that the government could default on its debts, essentially declaring bankruptcy. A more likely loss of profit could occur due to inflation. If inflation rises fast enough during the maturation of the t-bill, an investor might still receive his full payment from the government, but find it worth less than his initial investment due to the falling value of the dollar. Thus, even the safest bets in the market cannot entirely be considered risk-free investments.

Risk-free investments, while theoretically possible, can almost never be guaranteed. Stocks, bonds, and other investments do not exist in a vacuum, meaning that to some extent their risk level is affected by external events. A decline in the value of a market, a crash in a related area, or a reduction in liquidity can all damage the earning potential of an investment. Even on a macroeconomic scale, events may have repercussions for supposedly risk-free investments: if another country suddenly defaults or experiences an economic crash, the effects on the currency market alone could potentially add risk to nearly any type of investment.

Since risk-free investments cannot usually be guaranteed, the process of investing often involves creating a balanced portfolio that reduces risks. This may mean crafting an investment strategy that counterbalances risky investments with relatively safe ones in order to ensure at least some profit in most market situations. There are dozens of strategies designed to reduce risk in investing as much as possible, but it is important to remember that the total guaranteed elimination of risk is an elusive goal.

Share
WiseGeek is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Jessica Ellis
By Jessica Ellis
With a B.A. in theater from UCLA and a graduate degree in screenwriting from the American Film Institute, Jessica Ellis brings a unique perspective to her work as a writer for WiseGeek. While passionate about drama and film, Jessica enjoys learning and writing about a wide range of topics, creating content that is both informative and engaging for readers.

Editors' Picks

Discussion Comments
Jessica Ellis
Jessica Ellis
With a B.A. in theater from UCLA and a graduate degree in screenwriting from the American Film Institute, Jessica Ellis...
Learn more
Share
https://www.wisegeek.net/what-are-risk-free-investments.htm
Copy this link
WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.

WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.