What Zero-Risk Investment Actually Looks Like

Investors who have been around long enough know that investment gains are hard-earned. That wisdom seems quaint in years of market surges and speculative successes. But those who went through the 2000-2002 bear market, the Great Financial Crisis in 2008, or the shock of February 2020 when markets fell 34% in a little over a month, according to Investopedia’s timeline of U.S. stock market crashes, know that markets require a price to extract returns.

For more novice investors, it is not clear that returns must be earned. Newer investors, or those who have mostly experienced markets ripping higher, might ask, “I need to fund my standard of living but don’t want to take risk” or “What is the next sure-thing trend or sector?” or “Should we move to cash until this uncertainty blows over?” Hundreds of similar questions circulate, but at the core of nearly all of them is the desire for a free lunch: return without risk.

The instinct to avoid risk usually serves us well in other areas of life, but the same instinct can work against us in investing. Markets generally reflect the relationship between risk and return, and this happens through the incorporation of information and news into prices very quickly. Energy stocks moved instantly after U.S. forces captured Venezuelan president Nicolás Maduro in a raid, Business Insider reported, and healthcare stocks reacted just as fast when regulators proposed nearly flat Medicare reimbursement rates, according to Morningstar. The speed is why the market can seem to swing for no clear reason on an ordinary day.

This isn’t to say that quickly updated prices are always right and true, but they are fair enough to keep us from making easy money. We are as likely to find an obviously and egregiously mispriced asset as we are to find a dropped $100 bill in a crowded park. Like a crowded park, the market consists of many people, just like us, who act to make sure free money doesn’t just lie around.

However, if our true goal was to invest without risk, we do have an idea of what that would look like. The so-called “risk-free rate,” or the interest rate you could receive with a minimal amount of risk, is probably best represented by a one-month Treasury bill. Over the last 100 years, these have returned 3.3% annually, according to DFA Returns data going back to 1926, while inflation has averaged 3%, according to Investopedia’s historical inflation data, putting the real return close to zero.

Reality matches up fairly well with the no-free-lunch theory. Risk and return very much appear related, and a risk-free investment produces a near-zero real return. Extracting real returns from markets requires a cost in the form of taking risk.

Accepting investment risk means acknowledging that outcomes are uncertain. However, this risk brings with it the potential for returns, the compensation investors have historically sought for accepting a level of uncertainty. Investing in companies that create the goods and services we rely on may not deliver a return exactly when we expect it, but over time, the market has compensated investors who stayed the course.

The goal is not to avoid uncertainty altogether, but to understand it, price it appropriately, and manage it. Savant’s investment management team builds portfolios designed to align with each client’s goals, objectives, risk tolerance, and financial circumstances. If you have questions on this, please connect with your Savant advisor.

This is intended for informational purposes only. You should not assume that any discussion or information contained in this document serves as the receipt of, or as a substitute for, personalized investment advice from Savant. Please consult your investment professional regarding your unique situation.