Editors' pick: Originally published May 19.
Despite what the U.S. government may say, all investments carry risk.
A risk-free investment is one where an investor gets paid a guaranteed return with no chance of losing any money. U.S. Treasury bills are defined in the world of finance as a risk-free investment because they are short-term loans to the U.S. government.
So a loan made to Uncle Sam is backed by the taxing power of the world's richest country. If the U.S. government doesn't have enough money to make good on its obligations, it can just raise taxes or print more money.
The interest rate on a three-month U.S. T-bill is used as the risk-free benchmark when putting a value on other investments. This rate is used by stock analysts as a part of figuring out a stock's valuation.
But being risk-free all depends on one's definition of risk.
Generally, bonds (like U.S. Treasuries) are considered less risky than commodities or stocks. If a bond is thought of as a loan, there are two ways to lose money: the borrower can't (or won't) pay you back (default risk); or, the money that is paid back isn't worth as much as the amount borrowed (inflation risk).
A country rarely defaults on a bond, though many countries have done it at some point in their history. Argentina and Greece are two of the most recent offenders.
Just a few countries have never defaulted on their loans, including Canada, Great Britain, Malaysia and Singapore. Although the United States has come close to defaulting in the past, it technically never has done so.
In 2011, Standard and Poor's credit rating agency downgraded the U.S. credit rating one level from the highest rating of AAA to AA+ due to political grandstanding that almost caused the United States to default. Although AA+ is still an excellent score, S&P was saying that the richest country in the world was no longer risk-free.
Recently, U.S. Republican presidential candidate Donald Trump said, "I would borrow, knowing that if the economy crashed, you could make a deal."
He went on to say, "And if the economy was good, it was good. So, therefore, you can't lose."
A presidential candidate essentially calling loan repayments negotiable further dispels the risk-free fantasy (Although he later walked back these comments, there is no telling where he actually stands on the issue).
However, the biggest risk to T-bills is inflation, which causes the purchasing power of money to decrease because of rising prices. If inflation is high and prices are rising, $100 today won't be able to buy the same basket of goods a year from now.
To account for inflation, an investment's real rate of return needs to be considered. It is calculated as the stated return, or interest, earned, minus the inflation rate.
So, if an investor earns 3% annual interest on a bond and inflation is 2%, the real return is 1% (3% - 2%).
A positive real rate of return means that an investment performed better than the inflation rate, and a negative real rate of return means that the investment lost money once inflation is factored in.
In a stable economy, the inflation rate is typically not high, but low-yield investments such as T-bills are still affected because their returns aren't high either. So, an investor could actually lose money with T-bills if the inflation rate is higher than the nominal rate of return.
For example, a 12-month U.S. T-bill bought today yields about 0.6%. As of the end of last month, the annual U.S inflation rate was at 1.1%, meaning that the real return on this 12-month T-bill would be negative 0.5% (0.6 - 1.1) if inflation stays at this level.
That means it is no longer a risk-free investment. If one invested $100 in a 12-month T-bill, that investor would get $100.60 back next year, but after inflation, the buying power of that $100.60 would only be $99.49.
On top of this, some think that governments actually under-report the actual inflation rate, but it could be even higher. That means the real return is that much lower.
Even if Trump becomes president, investors probably won't have to worry about the U.S. government defaulting on a loan and not paying them for T-bills. But that doesn't mean that they are risk-free investments.
What is often overlooked when figuring out investment returns is inflation. If an investor is earning a negative real return, the investment has inflation risk.
So, even risk-free U.S. government Treasuries are nothing of the sort.
Kim Iskyan is the founder of Truewealth Publishing, an independent investment research company based in Singapore. Click here to sign up to receive the Truewealth Asian Investment Daily in your inbox every day, for free.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the investments mentioned.