Thursday, November 13, 2008

Are U.S. Treasuries Really The Best Investment?

There was an article published on Yahoo Finance this morning written by Ryan Barnes for Investopedia.com that detailed the top 10 investments for baby boomers. The number one investment on the list was U.S. Treasuries, followed by certificates of deposit (for the full list you can read the article here). While baby boomers are nearing retirement and age certainly plays a factor when selecting investments, are U.S. treasuries really the best investment out there?

Here was the explanation for the choice as explained in the article:

“Any good list of investments for retirement-aged individuals could start and end here. Treasuries are the ultimate in safe, reliable investing - in fact, their yields are often considered the literal benchmark of safety (the risk-free rate of return) - when modeling more risky investments. The U.S. government has never defaulted on a Treasury bond, making them a beacon for investors all over the world. However, you access exposure to Treasuries - via mutual funds, exchange-traded funds (ETFs) or individual bonds - they should have a high weighting in your overall portfolio.

For the vast majority of investors over the age of 60, capital preservation is more important than capital appreciation (such as gains from stocks). Treasuries provide this, along with a steady stream of income and a good shot at preserving your assets in the face of inflation. Corporate and municipal bonds are also solid investments in the same vein, but default rates are higher and more research may need to be done on the part of the investor to evaluate their merits.”

With today’s volatile market conditions, it is hard to argue that investors shouldn’t be concerned with the safety of their investment principal, however I think this article overstates the safety of U.S. treasuries. It is not just this article, either; pretty much every investment advisor and investment handbook out there preaches that U.S. treasuries are “risk free.” Of course I would argue that no investment is risk free, especially considering all the economic and financial challenges that the U.S. faces. Sure, the U.S. has never before defaulted on their debts, but that is what everyone says until the first time someone defaults. Chances are the U.S. will probably not default if push comes to shove, but there is a good chance that they will be forced to print an excessive amount of money in order to pay on all this debt that they have piled up. Printing a bunch of new money will lead to dramatic inflation, and considering the low level of interest paid out on U.S. treasuries, high inflation will kill investors.

That being said, U.S. treasuries certainly have their place in investment portfolios, but should they comprise the entire portfolio, as Barnes suggests would be acceptable? I certainly would not recommend it. I think it is very important also that people understand that U.S. treasuries are not risk free. Their risk might be less than other investments out there, but they are most definitely not risk free. And to have one's entire investment portfolio comprised of U.S. treasuries is a huge risk. Not only are you taking a chance that inflation eats away your retirement, but what if the U.S. does default? That is always something hanging out there as a possibility, and if your entire retirement is banking on one investment, your risks are amplified. Even if you are the biggest fan of U.S. treasuries out there, you still want to diversify.

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