UPFINA's Mission: The pursuit of truth in finance and economics to form an unbiased view of current events in order to understand human action, its causes and effects. Read about our mission here.

Does the title sound too good to be true? Is it even possible that there exists such a concept as a risk-free investment? Broadly speaking, when such statements are touted it is typically accompanied by a sales pitch. Let me assure it is not the case here, you will not be sold anything, and at the end of this article you will see what the “#1 Guaranteed Risk Free Investment” is and what it is not. This article is written with an intention to dispel the myth of the risk-free investment finally. Most often than not, it is wise to be skeptical whenever someone uses such a pitch wherein the keywords like “guaranteed”, “risk-free”, “low risk” or “investment” are all in the same sentence.

Before revealing the all-important low-risk investment, some psychological factors need to be observed. Depending on how you think about things you might analyze activities and/or investments in terms of what you stand to lose, or said another way, the danger you have exposed yourself to (risk). Whether this is something you think about constantly or not, this is  the proper means to approach any investment decision. Everyone always assumes a jackpot is awaiting at the end of a rainbow when making an investment. However, nothing is ever as great as you hope nor as dire as you fear.

The Myth Of A Risk Free Investment

Is it possible that there exists such thing as a “risk-free” investment? An instance of a risk-free investment would be you making a bet for five dollars, whereby if you lose, you do not have to give away the five dollars to the counter party. In such a case, what would be the incentive for the other person to enter the wager with you if the payoff only exists in one direction – when you gain? Such a circumstance would not happen in financial markets nor with any investments. If this is the case, there is a strong possibility that you are involved in a pyramid scheme – which always, sooner or later, end in tragedy for all investors associated with them.

You may have heard about “risk-free” investments in universities wherein contemporary literature often touts that US Treasury Bills (10-year Notes) trade at the “risk-free rate” because the United States Treasury has never defaulted on its obligations. This logic is disastrously flawed to the extent that’s hard to express in this article alone. Both of those assertions are false: a debt instrument cannot be a “risk-free” investment and the fact that the United States Treasury has defaulted on its obligations and does so regularly by way of eroding the purchasing power of its currency through inflation. The foundation of the modern financial system has been established on a pillar of lies, debt, and deceit.

Have you heard the saying, “no risk, no reward”? No truer words have been spoken. This phrase explains that it is necessary to undergo some level of risk, even if it is only five dollars, to receive a reward. Otherwise, having not risked the five dollars, a gain would not be possible. The interest rate is a mechanism that specifies, based on investor perception and opportunity cost, the intrinsic reward for undergoing the risk. Any interest rate that is positive, above 0%, presupposes that there is a risk in the investment. In other words, to experience a reward, it is necessary to undergo some degree of risk.

Now that we have gotten the semantics out of the way and established that unless you experience risk, a reward is not possible – this makes the claim of a “risk-free investment with guaranteed returns” null and void in all circumstances, except for one.

Paying Off Debt

The number one risk-free investment with guaranteed returns is the repayment of debt. A dollar saved is a dollar earned. It surprises me how many people do not understand the sum of money they are wasting on the servicing of debt (interest rate payments). When acquiring a house, car or charging anything to a credit card – if done so through debt, rather than savings, the cost of the purchase becomes significantly higher.

For example, let us relate to the single biggest investment most people will make in their lifetime – the purchase of their home. Presume the cost of the home purchased is $250,000 (average price of a home in the United States is $234,900 as of November 30th, 2016) and the mortgage is at 4.5% for 30 years. For the sake of this example, we are assuming no property taxes and no insurance costs. The monthly payments on the home will be $1,266.71 for a duration of 30 years. Consequently, over the lifespan of the mortgage, in 30 years, instead of paying $250,000 for the house, your cost is $456,016.78, i.e. $206,016 or 82% higher than your purchase price. In other words, you paid for two houses but received just one. Recall, this estimate assumes you paid no taxes and no insurance. The reason this happens is that monthly you paid the bank a debt service fee, which compounds every month and equates to a cost of $206,016 over 30 years.

Earning Extra Income

The goal of this article is not to scare you, but to hopefully help you realize that debt, often, is not a solution, but a problem. Staying with the mortgage example: paying off your debt early, you ensure yourself an extra income of $1,266.71 per month for the duration of the mortgage. So, rather than analyzing which hot stock you could buy or if you will win the Mega Millions jackpot, realize that the answer to financial well-being is much easier to achieve. So, if you are indebted today, whether it is your credit card or your mortgage, realize that the number one risk-free guaranteed investment is the repayment of your debt and it is never too late to begin. To help you get there check out 10 fast and easy ways to make money today. 

Have comments? Join the conversation with us on Twitter.