The era of TINA, or “there is no alternative,” is officially over in 2023. For over a decade, investors were practically forced into the stock market because U.S. Treasury bonds paid next to nothing. Now, however, jacked-up interest rates might tempt you to park your cash in government debt notes.
I can understand the temptation. In high school economics class, you may have been told that government bonds offer a “risk-free” return on your investment. That’s based on the assumption that there’s no counterparty risk because the U.S. government won’t default on its obligation to repay you the loan with interest.
Granted, the financial headlines are buzzing about how the government might default on its debt obligation, but that’s an obligation to large-scale creditors. Don’t get me wrong – the fallout from history’s first U.S. debt default would be catastrophic, but it doesn’t necessarily mean your bonds would lose their value.
So, while retirees and other cautious investors were practically forced out of bonds, savings accounts, and other ostensibly low-risk asset classes due to their intolerably low yields, the landscape has shifted dramatically in 2023. Recently, a 30-year Treasury bond offered a yield of 3.929%, while the 10-year T-bill yielded 3.683% and the 2-year T-bill yielded 4.268%.
I know, that’s bizarre and backwards as a longer time commitment should result in a greater yield, not a lower one. Hence, we have the “inverted yield curve” that signals the bond market’s expectation of an imminent recession and resultant interest rate cuts.
Courtesy: St. Louis Fed
A deeply inverted yield curve implies that something is broken in the financial markets, but it’s not necessarily predictive of an oncoming recession. In other words, I’m definitely not suggesting that the answer is to stay in an all-cash position for an extended period of time.
In any case, the changed landscape may lead investors to switch their outlook from TINA to TARA, or “there are reasonable alternatives.” Are government bonds the most reasonable alternatives, though?
Probably not. If the 2-year T-bill yields 4.268%, it’s still not keeping up with the inflation rate, which stood at 4.9% in April. To put it another way, with government bonds, you’re not generating sufficient returns to outpace the wealth-destruction effect of inflation.
Besides, there’s no mandate that anyone has to get out of stocks completely. Anything that offers reasonable risk-adjusted returns – something that beats the 4% or 5% that bonds might provide per year without incurring undue downside risk – is certainly worth considering.
A basic S&P 500 tracking index fund might provide returns of 8% to 10% per year including dividends, but there are risks involved with this strategy. So, don’t just try to compare the raw percentages of an index fund with Treasury bonds and assume that one is superior to the other.
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Furthermore, if you just buy the S&P 500, you’re getting exposure to a few great companies, some good ones, a lot of mediocre ones, and some that are destined to get kicked off of the S&P 500 at some point. Informed investors don’t have to settle for this less-than-ideal mix of the good, the bad, and the ugly in their portfolio.
To me, settling for an index fund, government bonds, or a mix of the two feels like giving up and taking the path of least resistance. If you’re reading this, then surely you care enough about your wealth and your financial future to just settle for substandard returns.
Moreover, fixed-income assets have become so “obvious” that bonds and money market accounts are now a crowded trade. Personally, I tend to avoid crowded asset classes as they tend to produce subpar or even disastrous forward returns.
What’s the real alternative, then? The answer has been there for thousands of years, long before U.S. Treasury bonds existed. Gold and silver are assets that will continue to have value if even if governments and central banks continue to commit one policy error after another.
If you don’t mind taking on more risk, Bitcoin and Ethereum could be attractive alternatives to cash and bonds. They don’t have to comprise 100% of your portfolio, by any means, but I believe they’re worth investigating and considering.
So, while it might feel clever to circumvent the risks associated with the stock market by holding government bonds, just remember that plenty of people have already thought of this “solution” – and when something seems like easy money to too many people, it’s probably time to look elsewhere.
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