Stocks, bonds, and Bitcoin are down sharply this year as inflation and interest rates soar. The Federal Reserve continues to raise short-term interest rates to try and combat inflation, and, as a result, cash is an alternative to stocks and other growth-oriented assets. Why is it time to buy T-Bills? Let’s find out.
T-Bills are the safest investment in the world, guaranteed regardless of how much you invest. If you want safety and liquidity, look no further. The current rate for a one-month T-Bill is 2.56%, and if you extend the maturity to one year, it jumps to 4%, a sharp increase from the past couple of years. The 1-Year T-Bill has ranged from a high of 8.64% to a low of zero since 1990, and the 32-year average has been 2.85%.
According to Barrons, Berkshire Hathaway, led by Warren Buffett and Charlie Munger, own more than $75 billion worth of T-Bills.[1] They use them to fund their corporate operations and make strategic acquisitions. In last year’s annual report, Mr. Buffett had this to say about cash and other short-term investments, “Charlie and I have pledged that Berkshire (along with our subsidiaries other than BNSF and BHE) will always hold more than $30 billion of cash and equivalents. We want your company to be financially impregnable and never dependent on the kindness of strangers (or even that of friends). Both of us like to sleep soundly, and we want our creditors, insurance claimants, and you to do so as well.”
Here are a few reasons to buy T-Bills.
- T-Bills are an excellent choice if you’re anxious about rising interest rates. They are auctioned weekly with maturities of 4-, 8-, 13-, 26-, or 52 weeks. It’s possible to build a short-term ladder with bills expiring weekly, and if interest rates continue to rise, you can reinvest your proceeds at higher rates without suffering a principal loss.
- T-Bills can protect your account if you’re worried about a further stock market correction. Transferring 50% of your account to bonds from an all-equity portfolio can lower your risk by 37%. T-Bills are a hedge against falling stocks because they’re negatively correlated. The S&P 500 lost 8.25% in June, and T-Bills rose 0.06%, and during the initial phase of COVID, stocks fell 12.4%, and T-Bills jumped by 0.13%.[2]
- T-Bills can offer you more safety than your bank if you hold a significant cash position. T-Bills are guaranteed, regardless of the amount you buy. Rather than transferring money between several banks to qualify for FDIC insurance, you can purchase T-Bills.
- If you need your money in one year or less, T-Bills offer liquidity and safety not found in other investments, like stocks.
Treasury Direct (https://www.treasurydirect.gov/) is an excellent way to buy US Treasuries. After you create your account, you can participate in auctions or buy existing issues. You can also contact your advisor if you don’t want to buy them yourself.
T-Bills are bought for safety, not for growth. You must own stocks to create generational wealth and T-Bills to preserve it.
Bye, bye, and buy bonds.
“Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.” ~ Paul Samuelson
September 19, 2022
Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.
Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.
[1] https://www.barrons.com/articles/warren-buffett-t-bills-ultra-safe-investment-51660580408, by Andrew Bary, August 16, 2022
[2] DFA Returns Web