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 is market risk?5 Views
Finance Allah shmoop what is market risk All right There
are a lot of risks when you invest money Two
of the most common categories are unsystematic risk And yes
of course systematic risk Also known as market risk Well
unsystematic risk refers to risks linked to a specific stock
or security So you buy shares in your dad's publicly
traded ice cream company and the company goes bankrupt Who
knew pork rind ice cream would prove so unpopular Who
knew well that's unsystematic risk You made a bad investment
and you paid for it by losing everything you invested
un systematically Well that's individual stock risk or in systematic
risk AII bad brain bad return What not all investments
do well In fact many of them do poorly even
for the best of investors So most professionals diversify their
eggs such that not all of them are invested in
one stock or one basket So that revolves around unsystematic
risk That is risk You can actually do something about
and improve your odds of being successful like by being
a good smart investor But then there's market risk which
just exists as a natural part of the risk world
For illustrative purposes You could choose to not take any
road risk Like when you drive on the roads Your
odds of being hit by some idiot texting his girlfriend
and not looking at the double yellow line are not
one in a good Gillian right You also have a
risk of a tire blowout or a tree falling on
you or skidding into a mailbox on that hill with
the gravel in the oil slick from the construction people
right Those are all quote market risks unquote of driving
So why do it Why drive Why not just stay
home Never leave the house get Amazon and door dash
and ups to take care of all of your needs
and never suffer the market risk of dying on the
road Well for some people this probably is a good
idea Well the same allegory lives in the stock market
When you invest in stocks odds are extremely high that
at some period while their value will go down maybe
a lot You can't head yourself against things like terrorist
attacks and natural disasters political upheaval and zombie apocalypses or
apocalypse side They say The zombie There's no real way
to protect yourself against market risk It's just systematic It's
part of the system Got it So there's no way
to deal with market risk other than for one thing
time Historically the stock market goes up over time Check
out this glorious chart running for one hundred years in
change for what the market is done without even calculating
the additional return from dividends distributed along the way Well
you can see that there has rarely been an extended
period of time when the market didn't go up and
or at least distribute enough in dividends Such that in
each decade while there's been a nicely positive return from
being invested in the stock market could this suddenly change
and go the other direction such that we have half
a century of no growth Sure but that would be
a big departure from the way our driving has gone
in the past on the roads But you never know
There's always the N plus one idiot out there texting
and driving and you know really not giving a
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