Is there any risk in investing in risk-free assets?

Disclaimer: Please note that all content and information in this blog are for educational and informational purposes only and should not be taken as professional investment advice.

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While risk-free assets are especially attractive in a high interest rate environment, they are not completely "riskless". Investing in risk-free assets comes at an opportunity cost or "risk", which is the risk of capping your maximum returns at the risk-free rate. 

By investing in risk-free assets, you are essentially accepting the risk-free return as your maximum return, and in doing so, you are forgoing a lot of potential returns. The opportunity cost of investing in risk-free assets are the potential returns you could have earned if you invested in non-risk free assets like stocks. While the returns of stocks are not guaranteed unlike risk-free assets, it provides the potential for you to make more money than what the risk-free rate offers, which is much better in the long run, if the money invested in the stocks is money you don't need now and can afford to not touch it for years.

Investing in stocks will likely pay-off significantly higher returns in the longer term as compared to risk-free assets. So while many associate risk-free assets being "riskless", when compared with other investments, they are not as "riskless" as people think they are. You are essentially forgoing higher returns for lower returns from the risk-free asset, and in doing so, you are capping your maximum returns at the risk-free rate, which isn't ideal for the long run, given that the risk-free rate tends to average below inflation rate. So while your money's nominal value is growing steadily, your money's real value isn't, and is likely losing its value over time.

Thus it is important to diversify beyond just riskless assets into equities and bonds which can give you returns above the risk-free rate, even if it means taking on some risk, because everyone is able to take on risk — it's just a matter of how much and for how long. The more risk you can stomach, and the longer you can stomach it for, the more likely you are to make much larger returns in the longer term.

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Disclaimer:
The content and information provided on this blog is solely for educational and informational purposes, and should not be construed as financial advice. The accuracy or completeness of the content and information provided in the blog cannot be guaranteed. Before making any investment decisions, it is important for readers to research and carry out independent verification of the information provided, or consult with a qualified financial professional. No warranty and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of actions taken based on the ideas or information found in this blog.

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