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Ihear a lot of financial advisors (on the financial news networks) discussing how their clients like Treasury bills at current yields. The idea is that investors can safely invest in T-bills and avoid the next stock market crash.
I have some thoughts on this investment tactic, because this is not nearly as good an idea as it might sound…
The first thought is: what is the source of the money investors are now putting into T-bills? A couple of years ago, stocks were the only game in town, so it is likely that most of the money now going into T-bills was invested in the stock market in the recent past.
Since most investors trade based on greed and fear, I suspect that much of what is now going into T-bills came out of stocks after last year’s bear market. These investors bailed on stocks after seeing their accounts drop by 20%, 30%, or more. This type of investor “saved” his portfolio value by selling to lock in losses.
Financial news pundits kicked off 2023 with almost universal predictions of a recession and further stock market declines. With those expectations, investors felt smart by keeping their money in secure T-bills. Also, T-bill rates near 5% looked much better than the near zero percent in effect a couple of years ago.
Unfortunately, as is usually the case, the experts were wrong. The economy has not gone into recession. More importantly, the stock market performed very well. The S&P 500 gained 16.5% for the first half of 2023, and is up 25% from the bear market low set in October.
Buy hey! Six-month T-bills pay 5%.
Well: not exactly. Those T-bills have a yield of 5%, which means a six-month T-bill will return just 2.5% over its term. Many people struggle with investment math, and many T-bill investors will not be happy with the measly returns when they become cash earned.
From these thoughts, I hypothesize that as the T-bills mature, investors will…
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