Risk free returns?

I recently saw an advert for RSA Retail Bonds that was advertising “risk-free” returns. This kind of thing really gets up my nose and in my opinion it smacks of false advertising…RSA Retail Bonds are not the only culprits – just about all of the banks do it too.  “No fees or commissions” or “Risk-free”.

Let’s get this straight – there is no such thing as a risk-free investment. The reason they are advertised as “risk-free” is because they are only ever referring to one kind of risk; that of volatility! These “investments” never refer to inflation risk and they also assume that “default” risk could never apply either!

Broadly speaking there are 2 kinds of risk that really matter to investors: volatility and inflation and they are kind of on the opposite ends of the risk spectrum from one another. Volatility is a short-term risk whereas inflation is a long-term risk.

When things like RSA Retail Bonds claim to have no risk associated with them they are referring to volatility and that is all. They are not claiming to be risk-free, especially when it comes to inflation risk. This is, in my opinion, misleading. You could well invest your money into these kind of investments believing that you are taking no risk at all (because that is what the adverts imply) and then find out that when your investment falls due that you actually have less money (in real terms) than when you started off – all because you did not take enough risk. It’s kind of ironic that in order to counter inflation risk you need to take some volatility risk.

On top of this, any money invested into the RSA bonds is locked in for a minimum of 2 years. The historic returns from these investments have been around 7% pa. By contrast, if you had invested into an “enhanced income” type unit trust fund you would have had returns of ±8-10%* pa for the past few years and would have had access to all of your capital within 48 hours…and all because you took a little bit of (volatility) risk!

So be warned; RSA Retail Bonds are not “risk free” as is claimed. They carry a significant amount of inflation risk, especially after tax.

 

Note:

*typically these funds are designed to generate returns of “cash+2%”pa. This is not guaranteed and there is a small amount of volatility risk that could apply over periods of less than 12 months.

No TweetBacks yet. (Be the first to Tweet this post)

Leave a Reply