See: Treasury Bill.
There's virtually no risk when the U.S. Government promises to pay back a loan. Or at least there hasn't been since we IPO'd in 1776. The whole world believes we're safe...the safest bet there is. So we get to borrow money at the lowest rates that exist, more or less. Our bonds then are essentially a risk-free asset. And that's good. Near certainty of payback.
But the bad news: when you have something with almost no risk, like when you're an investor in those bonds, then you have almost no reward. They pay way less interest than most corporate bonds. And they're taxable to boot, so the government recoups a good chunk of the interest they're paying anyway in the form of taxes.
So, yeah..."risk-free" is kind of a misnomer in a sense. There are other risks, like losing out to inflation rates, and the opportunity costs of having not invested your money elsewhere to make better returns. All reasonable alternatives to putting your dough in a risk-free asset. And almost all of those alternatives carry a spread to that return rate of the risk-free number that's a premium to it. Like...if you're investing in a package of 37 loans on apartment buildings in Reseda, CA, those bonds pay 5.37% interest versus the risk-free asset rates of 2.00%, or a 337 basis point premium against them.
Related or Semi-related Video
Finance: What are Systematic and Unsyste...14 Views
finance a la shmoop what are systemic and unsystematic risk systemic risks are
just endemic to the market want to invest in the stock market and compound [Plate of vegetable appear]
return your way into great wealth great but then you'll suffer the normal risk
of the system that risk specifically is this yeah best of times worst of times
but up over time the market goes up you just have to embrace the notion that [Man hugging a tree]
there is systemic risk in that in the short run you can buy an S&P 500 index
fund here then lose like a third or whatever of your money in not too many
years but if you don't panic and sell just at the wrong time here right out
the storm and keep going well then you should be just fine by the time you
arrive here so that's risk that is always in the system equities rise and [Equity in the ocean]
fall like the tides or something like that but generally they rise and if you
want to swim in this bathtub well you get used to the turbulence and have an [Girl swimming against the tide]
airsick bag handy all right that systemic risk or systemic risk
what's unsystematic risk well it's bad investors or rather bad investing it's
panicking and selling your stock just when you should be doubling down its
buying lousy companies thinking that they're cheap today but not realizing [Woman runs away from smelly girl]
that they will always be cheap because they're lousy or in a lousy industry or
run by lousy management it's buying into lousy industries that also look cheap
but are dying hello paper and pulp is yeah anyone really think that's gonna be [Paper printing]
around in 20 years all right well it's believing the dreamy hopes and prayers
of future earnings and trusting that there really will be 5 million [Traffic on the highway]
driverless cars on the road in 3 years you know good luck with that we'd love
it to be true but ain't gonna be unsystematic risk is also investing in
bonds for the long-term taking very little risk when taking little risk is
the opposite of what you should be doing when you're a young investor so yeah
systematic and unsystematic risk both exist plentifully and both can bite you [Dog bites portfolio from woman]
right in the portfolio so you got to know what both are and embrace them
for what they're worth
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