Five Percent, guaranteed!

The United States Treasury Bill is enjoying its fifteen minutes of fame as interest rates soar. The T-Bill currently pays more than 5.5%, so should you T-Bill and chill?

Growing up, I often went to First Interstate Bank with my mom to cash checks, make deposits, or withdraw money. Our visits were pre-everything, so we had to enter the lobby, and I remember signs and posters touting T-Bills. The rates were attractive because this was during the inflation-fueled days of the 1970s, but I was too young to realize that inflation was destroying their actual return.

The T-Bill is outperforming most stocks in the S&P 500 this year. There are 315 companies, or 63%, in the index earning less than 5.50%. The T-Bill is also beating the Dow Jones Industrial Average.

The full faith and credit of the United States Government back the T-Bill. It’s guaranteed, and they have zero default risk if you hold it to maturity. It is considered the safest investment in the world and has never lost money since 1926. If it is paying 5.50%, guaranteed, why wouldn’t you put all your money in this vital asset class? A $1 million investment can pay you $55,000, not bad.

However, interest rates fluctuate, and from 2008 to 2016, the one-month T-Bill paid less than 0.25% and earned 0.00% on several occasions. During COVID, it yielded less than 0.07%, and 0.00% was the norm. T-bills can also offer double-digit rates as they did in the 1970s and early 1980s. In 1981, earning more than 14% was possible.

Treasury Bills track inflation. Since 1926, they averaged 3.25% annually, but inflation averaged 2.95%, so your net return was 0.30% before taxes. Over the past decade, T-Bills returned 1% annually, and inflation averaged 2.76%, so you lost 1.76% every year. The S&P 500 averaged 12.81% this past decade and 10.24% for the past 97 years.[1]

A T-Bill is a valuable short-term investment if you need money in one year or less or it’s required to meet an obligation like buying a new car or paying tuition, but it’s a poor choice for the long haul. Buy stocks if your time frame is three to five years or more.

I understand the craving for a safe, secure investment paying more than 5%, especially after the volatility of stocks over the past five years. Despite the periodic losses in 2018, 2020, and 2022, the S&P 500 averaged 10.34% annually, compared to the T-Bill return of 1.58% per year.

Safety is in the eye of the beholder.

A 10% decline in the market is fairly common—it happens about once a year. Investors who realize this are less likely to sell in a panic and more likely to remain invested, benefitting from the wealth building power of stocks. ~ Christopher Davis

October 7, 2023

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.

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. Prices and yields are for today only and are subject to change without notice. Past performance is not a guarantee of future performance.


[1] DFA Returns Web 1926 – September, 2023

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