Opportunity Cost

Bill Parrott |

Ulysses was tied to his ship's mast to avoid the Siren's song and crashing it on their island. We must follow Ulysses' lead and avoid the temptation. What is today's siren song? It is the 5% United States Treasury Bill. The rate is attractive and sweet, luring your dollars to its safe shore, but if you steer your finances towards this enticing vehicle, it could destroy your long-term finances.

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What is opportunity cost? It is how best to allocate your resources; when you select one item, you forego another. For example, if you buy US Treasuries, you sacrifice growth; when you buy stocks, you give up short-term safety.

Current rates are appealing when compared to the zero interest rate environment we experienced during COVID-19 and last year's stock market correction, where the Nasdaq fell 33%. A 5% rate is a haven, providing short-term safety for most investors.

Historically, T-Bills have averaged 3% annually, but inflation also has, so your net return has been zero. The current inflation rate is 3.24%. If you buy a one-month T-Bill, your net return is 2.3%, above the historical rate, but it's unlikely to continue because short-term rates typically reflect the inflation rate. Lately, interest rates have fallen as inflation has cooled, and the US 10-year Treasury Note yield has dropped about 12% over the past month.

When is the best time to buy stocks? It's when fear is high and the days are dark, which occurred last October. It wasn't easy to buy stocks, but it was the right time. Since the lows, all three major indices have climbed significantly, led by the Nasdaq, up 38%, crushing the return of safe investments like T-Bills. Gautam Baid, author of The Joys of Compounding, said, "Your life today is a result of your past choices. Hard choices, easy life. Easy choices, hard life." It's hard to buy stocks when they are falling.

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Does this mean you should jump ship and avoid safe, short-term investments? Of course not. If your time horizon is one to three years, then a considerable allocation to T-Bills makes sense. Another reason to buy a US T-Bill is if you need the funds for a specific purchase, like a new home or car.

If your time horizon is three years or more, invest a substantial portion of your assets in stocks. It's hard to stay invested during a market correction and times of turmoil, but your courage and patience will pay dividends as markets recover.

A short-term mindset can derail your financial future. Since 1962, the US one-month US T-Bill has averaged 4.40% annually, turning $10,000 into $143,000. The S&P 500, on the other hand, averaged 9.96%, turning $10,000 into $3.5 million.[1] Was it easy to hold stocks for the past 61 years? It was not. After all, we experienced the Cuban Missile Crisis, Vietnam, a presidential assassination, an Oil Embargo, inflation, deflation, market crashes, etc. Despite numerous challenges, stocks outperformed T-Bills markedly, achieving almost twenty-five times the performance of the safer alternative.

A 5% rate appears safe, but do not get seduced by its siren song. Do not let your fear of the unknown crash your financial future.

As I am. As I am. All or not at all. ~ James Joyce

November 24, 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] Dimensional Fund Advisors web research tool.