Since it is Saturday, I thought I would talk about another alternate investment: Treasuries. A Treasury Note or Bond is a loan from you to the U.S. Government. You buy a bond for $1000, hold it until maturity, then you get your $1000 back. In the mean time, you are collecting a dividend. That is the interest you are getting paid for loaning your money to the government.
Notes or Bonds?
I believe that notes are shorter-term treasuries and bonds are longer term. Please yell at me in the comments if this is incorrect. If you are buying directly from the treasury, notes will mature in 10 years or less. Bonds will mature in up to 30 years. I know there has been talk of a 40 year treasury bond, but I don’t believe that’s happened yet.
TIPS and Zero Coupon Bonds
TIPS are inflation protected bonds where the principal adjusts based on inflation, and the dividend adjusts along with it. While TIPS bonds do protect you from future inflation, it also pays less dividends. Think of it like this: Take the rate for a regular bond, subtract out inflation, and this is generally the rate for a TIPS bond.
Zero coupon bonds roll the interest into the principle and returns the all of it to the owner at maturity.
If instead of buying a treasury bond from the U.S. Treasury, you bought it on the secondary market, the price may vary from the price that was paid for the treasury bond initially. Typically this is a function of the going interest rate. For instance, if the bond was 10% when originally purchased and the going interest rate is now 9%, the bond would be more valuable. Remember that the bond is still paying 10%. If the original purchase price was $1,000, the price might now be $1,111.
If you believe the interest rate is going to decline rapidly, a long-dated treasury bond might be a good idea.
So When Is A Good Time To Buy?
If you are still in your earning years, a bond of any kind would either underperform good stock picks or be very risky (think junk bonds). So I would advise against them. If you keep cash in your brokerage account, say 30%, it is usually invested in a sweeps account, probably a fund of short-dated debt. That usually means treasury bonds with maturities of less than 5 years. With short-dated debt, the prices are typically stable so the fund can afford to pay a daily interest rate.
So really no need to purchase treasury bonds. Cash is better in this case.
If you are in your retirement years, you should probably convert a good chunk of your investments into bonds. Many people use ladders with bonds of various dates and set them up so that they pay interest monthly. This creates a nice little income stream.
Regardless of your place in life, you will probably still want some money invested in stocks.
Please let us know what you think in the comments.