Is Risk-Free Investment Really “Risk-Free”?

Although most people know that we need to invest our money to grow them for the long-term, most of us still keep the majority of our money in risk-free investments like the fixed deposits or our Central Provident Fund (CPF). That is because these investments guarantee our investment capital, which means we would never lose money in this investment. Or will we? Just how “risk-free” are these risk-free investments?

The Monetary History Of Singapore

Ever since the formation of Singapore and the Singapore dollar, we have experienced positive inflation for the most of the past half a century. This means that in most years, Singapore has had positive inflation figures.

For example, inflation was around 0.6% in July 2017. Inflation is the curse of cash. If we have an inflation of 1%, it means that our real purchasing power has gone down by 1% compared to a year before. What we can buy for S$100 last year would be worth S$101 this year. If we have just keep our money in the bank for that year, we would have lost 1% of our wealth.

Inflation fluctuates year over year. During the period from 2011 to 2013, inflation actually shot up more than 5%. During those years, if you have just kept your money in the fixed deposit for the 0.3% interest or your CPF for the 2.5% interest, are you really earning money?

In fact, during those years, you are merely reducing your losses. If the inflation rate is at 5% and you have only earned 2.5% that year, you have actually lost 2.5% of your wealth through that “risk-free” investment.

The stock market, on the other hand, might be much more volatile for an investor. Yet, it has proven itself that over the long-term, your wealth would grow faster than inflation, just by investing in the stock market passively.

Foolish Summary

Risk-free investment such as the fixed deposit might appear to be safe, but it is also an almost guaranteed way for you to lose money in the long-term.

So the next time you keep the majority of your wealth in these risk-free assets, think again.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn’t own shares in any companies mentioned.