Core Concepts, DebunkedBeginner📖 7 min read

The Illusion of Risk-Free

Nominal stability is not the same as real safety.

Cash risk
Purchasing power erosion
Bond risk
Duration and reinvestment risk
Hidden trap
Opportunity cost over long horizons
Best practice
Define safety by your goal and horizon

Cash and government bonds often feel safe because the number on the statement does not move much. But investors live in real purchasing power, and bond prices can fall sharply when rates rise. "Safe" depends on which risk you care about: volatility, inflation, or opportunity cost.

Table of Contents

Real vs. Nominal (The Only Formula You Need)

RealReturn=NominalReturn−InflationRateReal Return = Nominal Return - Inflation Rate
Purchasing Power Risk
The risk that your money buys less in the future even if the nominal number goes up.

Bond Risk Is Not Just Default Risk

Duration (Intuition)
A rough measure of how sensitive a bond’s price is to interest-rate changes. Longer duration usually means bigger price moves when rates change.
Misread: "Government bonds are always safe"
Misconception
If default risk is low, price risk is irrelevant.
Better Frame
Long-duration bonds can suffer large drawdowns when rates rise. The asset can be safe in one dimension and risky in another.

Practice: Define What You Mean by Safety

Checkpoint
Which asset is most exposed to purchasing power risk over long periods?

Key Takeaways

1

Safety depends on your horizon and which risk matters: volatility, inflation, or opportunity cost.

2

Cash can be risky in real terms; bonds can be risky through duration.

3

Define safety precisely, then build a diversified plan around that definition.

Related Terms

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