Investing Demystified

chapter 4

The minimal risk asset – safe, low-risk returns

Buy government bonds in your base currency if credit quality is high

This chapter is about finding the lowest-risk investment as the base on which a riskier portfolio can potentially be built. Your choice depends on currency: for a sterling-denominated investor, short-term UK govenment bonds are a good choice. As discussed previously, there is probably no genuine riskless security in the world today, but the probability that the UK government will default is very low; thus minimal risk.

By comparison, a US-based investor buying short-term UK government bonds would have the same security of getting his principal back, but would incur currency risk as the GBP/USD exchange rate fluctuations ...