Saturday, November 25, 2023

Going All-In Into Treasury Bills And Deposits?

With interest rates now at an all-time high since around 16 years ago, short term treasuries and bank deposits are providing a much safer and better deal in providing more bang for the buck (from a risk premium point of view). It is basically common sense; why would I want to plonk my monies in an investment with possible capital loss for maybe an additional 1-2% yield when I could put it in an almost-capital guaranteed place at an almost-guaranteed return?

Yet, investors (including myself) are going for the former, scrolling through numerous screeners, scrutinizing the ratios and financial numbers, getting knowledge on the company’s/sector’s/industry’s goings-on, and understanding the macroeconomics of the time, etc. I must confess it is hard work, and all these could be dealt away with by just applying the latest treasury bill and/or going down to the bank/financial institution that offered the best rates.


You can still do that, but for myself I would not switch 100% of my capital to them. As the adage goes, “Good times do not last forever”. We cannot expect that interest rates would stay high, and just like other forms of investments, they will go down eventually. This is because markets and economies go through a cycle, and other instruments would provide a better bang for the buck than treasuries and deposits. We need not look further than just two years ago when little people paid attention to them due to the low interest rate environment.


This is where we need to capitalise on the (deemed) only free lunch in the investing world, which is diversification. By diversifying, you can capture the prevailing highest return offered by an asset class / region / country / sector / industry / company on part of your investment portfolio, while at the same time protecting it from extreme drawdowns suffered by other asset classes / regions…etc.


Quoting the second part of the adage mentioned above, that is “Bad times do not last forever, too”, brings us to the diversification-related property of rebalancing. Depending on the preferred make-up, or asset allocation, of your investment portfolio, if an asset class begins to grow/decline beyond the set allocated level, you can either start selling/buying counters from that said asset class, or inject funds to buy up others, or both, to bring balance back to the portfolio.


Whilst some critics may say the method above reduces overall returns as compared to having a concentrated portfolio, which is correct, the main aim is to try to reduce as much risk as possible. Sure enough, we have had heard of success stories of investors/traders going all into one counter and reaped exorbitant profits, but what if the call was wrong? We cannot predict how the markets and economies turn out, and investing gurus and fund managers are not correct all the time, same as us retail investors. Thus diversification, rebalancing and asset allocation are a better defence against volatility and outright 100% capital loss (save for alien invasions and nuclear winters).


A final word for dividend investors: high interest rates are not favourable for equities and REITs due to high costs of leverage, and this brings a bargain for erstwhile healthy counters which were depressed overall by the situation. As we know current yield = dividend / current price, if the leverage is low, cash flow is strong and there are still profits, it is a good consideration to look at it further and swoop in if it is worth.

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