With world stock markets being hammered, there is no better demonstration of what risk truly is - the risk of losing your money.
This post titled 'Risk-Free Return' is the third foundation stone in your Financial Awakening. I hope you enjoy.
GOLDSMITH
Risk-Free Return
The third foundation block, paramount in your financial awakening is an understanding of the Risk-Free Return. I say paramount, as before you make any investment decision you should know exactly what return you can make, taking zero (or near to zero) investment risk.
Why take on additional risks, when you can reach your destination safely?
When it comes to risk-free returns there are different types, depending on who you are and the country in which your reside.
In the case of an Australian Citizen, I consider that there are 5 types of risk-free returns… plus… 1 risk-free asset worth an introductory mention.
The first of the risk-free returns is the US 10 year treasury bond – considered the risk-free investment of choice for bankers and fund managers the world over for 3 generations – currently paying interest of 1.47%pa.
The second, for an Australian, would be an Australian Government Bond – currently paying 0.93%pa.
The third would be a term deposit with a Big 4 Australian Banking institution – currently 1.5%pa
Presently, funds held on account with any Australian financial institution are backed by the Government Guarantee up to $250,000 per entity, per institution. As such a term deposit with a small Credit Union, has about as much risk of default as an Australian Government Bond. So forth, other term deposits. Currently 1.75%pa.
The fifth risk-free return – is the most important risk-free return of them all. It is generally a tax-free return and its nature is ‘debt reduction’. These ‘debt reduction’ measures might include, assuming no early payout penalties:
- Early repayment of a home loan – will currently save you circa 3% pa.
- Early repayment of an investment loan – should save you 3-4%pa.
- Early repayment of a credit card – save 20% pa.
- Holding cash in a 100% loan offset account – save 3-4% pa.
Before you make any investment decision you must at least give consideration to these 5 risk-free return opportunities, as described above and particularly the last. However, please be sure to ask about any early payout penalties on loans and other finance you might been looking to repay.
Over the coming weeks I will provide you with examples on how to apply the risk free-return concept to your financial decision making processes.
Now I mentioned that there was also a single ‘risk-free asset’. Care to take a guess what this might be?
Occasionally it is referred to as a ‘barbaric relic of a bygone era’.
The bankers and the ultra-rich have been telling you it is worthless for 120 years. ‘Just a commodity’ they say. Yet over the past 20 years alone, this risk-free asset has grown in value by approximately 450%.
In case you haven’t guessed already – this risk-free asset is… GOLD. Yes, GOLD is a ‘risk-free’ asset.
It is important to be clear here. GOLD is not risk-free because it provides you with guaranteed income or annual capital growth. Physically held GOLD is risk-free, because it is not a liability of any other party. Meaning there is no risk of default.
Don’t just take my word for it though. On 31 March 2019, GOLD was reclassified as a ‘Tier 1’ asset under the Basel III International Regulatory Accord. Meaning that for the purpose of International Banking Standards, GOLD is now always considered a ‘ZERO risk asset’.
We will be discussing GOLD in much more detail here at the Financial Awakening, over the months and years to come. And with great personal pride and pleasure.
GOLDSMITH
Image by Hermann Schmider from Pixabay
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