TBill and Chill ❌ Invest and Destress ✅

For anyone who is not a finance-oriented reader, I wanted to include a few definitions for terms I use throughout this piece: 

Risk-free rate: The rate or yield an investor expects to earn using a riskless asset, such as government-backed Treasury bills. 

Alpha: The excess return achieved in one asset versus another. If your portfolio returned 10% and the market returned 5%, you achieved an alpha of 5%. 

S&P 500: A stock market index that tracks large US companies. Usually, when people refer to the “market” they are referencing the S&P 500. 

Right around this time last year, cash suddenly became a hot topic. Investors could generate meaningful yields in Treasury bills, money market mutual funds, and their high-yield savings accounts. Risk-free, short-term, and highly liquid investments are what we refer to as cash equivalents. All of a sudden, investors could now yield between 4% - 5%, completely risk-free. 

Many of us, who had never experienced any meaningful yield were now able to get our hands on risk-free products that were yielding us nearly half of what we’d expect stocks to gain annually over long periods of time. Treasury bills became the talk of the town; everywhere we looked we saw risk-free rates. Brokerage firms even began marketing the fact that you could buy TBills on their platforms. Yes, these were the same guys who would tout the fact you could trade meme stocks on their platforms. My, how the tables had turned…

Couple this with the fact that the S&P 500 was down roughly 20% from its high, investors now had a safe haven. Or so they thought. 

Investors of all age groups began to hang out in TBills, collect their risk-free rate of 5%, and justify this tactical change to their portfolio with the kiss of death; “I’m just going to wait until things settle down.” A financial professional’s kryptonite. No matter how we explain it, that sweet risk-free rate carries a lot of weight in investors' decisions to change their allocations. 

It was a perfect storm and an insanely quick lesson. Tons of investors began timing the market, using the fact that Treasury bills’ yields were relatively high in comparison to the last 10 years. For investors, this was the perfect justification for changing their long-term allocations. Unfortunately, it would have been hard to find a worse time to get tactical than right around when the 3-month Treasury bill began to yield over 5%.

Ultimately, amongst the constant fear of recession, multiple wars, an upcoming election year, and the Fed's insatiable initiative to lower inflation, the S&P 500 absolutely ripped. Year to date, the S&P 500 is up over 20%. It appears that those still waiting in TBills for the market to settle down have missed an incredible opportunity. This is exactly what my firm explained to clients as people began to be swept off their feet for risk-free returns. The “risk” associated with a risk-free return is that of opportunity cost. An investor that is earning 5% risk-free must wait nearly 4 years for a 20% return to materialize. The S&P 500 did just that in less than 12 months.

Now of course this could have gone the other way. Stocks could have continued getting pummeled and the TBill investors would have been made out to be heroes for the trade that they made. However, that is not the point of this piece. 

Instead of focusing on the negatives, such as how investors lost out on the risk-reward of being invested, or the “what-ifs”, such as what would’ve happened had stocks continued their downward spiral, let’s focus on what we gained. 

Investors, especially young investors, just got an invaluable lesson on timing markets, long-term time horizons, and the opportunity cost of being risk averse. The best part? They learned this lesson in only 12 months. Something that financial professionals preach daily just transpired right before their eyes at the speed of light. Something that investors work to avoid throughout their entire careers. All in just 12 months. 

This lesson is worth much more than the 15% alpha achieved by the S&P 500 relative to a 5% risk-free yield those market timers lost out on. This can lay the groundwork for young professionals to realize that over long time frames, especially 20 years or more, we’re better off leaving our portfolios alone than swapping for a risk-free yield that is attractive relative to what we have known. We now know the burn of opportunity cost. 

Young investors now understand that when making a tactical portfolio decision, they may not even be aware they are trying to time the market at that moment. But likely, that is exactly what they’re doing. The media we consumed and the trading platforms we used fed us constant information making risk-free instruments seem like no-brainers. The alpha we left on the table serves as a mental capital gain, one in which an expensive and important lesson was learned: when it comes to long-term investing, time in the market > timing the market.

PS: This is not to say that cash equivalents are not important to us. There are numerous use cases for instruments such as TBills, money market mutual funds, or high-yield savings accounts. This piece specifically refers to tactically changing our long-term investment portfolios in light of the yield these instruments offered and the general market sentiment throughout 2023. 

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Have a more specific question or want to get your finances in order? Feel free to reach out to [email protected] for a free consultation!