Why I personally don’t do T-Bills / Bonds 🙅🏻‍♀️

Hihi Lemon8!! Before I explain my reasons on why I personally do not believe in T-Bills & Bonds, do understand that these are my personal opinions and yes even though I am a financial advisor, these are just some of the things I have observed after taking time to learn different investment products that would best suit my clients’ needs!

So, why do I personally not believe in T-Bills or Bonds? Let’s first talk about INFLATION. What is inflation exactly and why is it so talked about or important to people who want to invest?

📈 INFLATION :

- It is basically the rate at which the general level of prices for goods and services rises, eroding purchasing power. In simple terms, when inflation occurs, you need more money to buy the same things you could afford before. For example, if a loaf of bread costs $2 this year and $2.10 next year, that’s inflation at work. It often happens when demand for products exceeds supply or when production costs increase.

- In 2022, the inflation rate was at an astounding 6.1%, followed by 4.8% in 2023.

💵 BONDS :

- Let’s first talk about the returns that bonds give. Established on the SSB’s website, the returns they recently have are at 3.06%. With that, if the inflation rate is 4.8%, are you really growing or losing your hard-earned money?

- Bonds, I would say are more catered towards retirees. Why? Because, one, they are considered to be shorter term, which is perfect for retirees. It is a perfect instrument to PRESERVE capital, which is also just what retirees need as they do not want to park their retirement money under instruments that are riskier / volatile as their priority at that age would not be growing more money, but sustaining their capital instead. If you’re in your 20s, should you really be PRESERVING your money instead of letting it work harder for you?

- Nonetheless, to be fair, let’s discuss about both the pros and cons of bonds.

PROS -

👍🏼 Low Risk ; Good for retirees as SSBs are backed by the Singapore government, which is considered one of the safest issuers in the world. This makes SSBs a low-risk investment option, which is particularly appealing to retirees who may prioritize capital preservation over higher returns.

👍🏼 Steady Income ; SSBs offer a fixed interest rate that is known at the time of investment and remains constant throughout the bond's tenure. This provides individuals like retirees with a predictable and steady income stream, which can be important for managing living expenses in retirement.

👍🏼 Flexibility ; Investors can redeem their SSBs at any time without incurring penalties, making them a flexible investment option for retirees who may need to access their funds in case of emergencies or unexpected expenses.

CONS -

👎🏼 Fixed Returns ; One of the drawbacks of SSBs is that they offer fixed returns. In times of high inflation, the purchasing power of the interest income from SSBs may erode as prices rise. This means that the real return (adjusted for inflation) on SSBs is lower during periods of high inflation. And as you can see, 2023’s inflation rate was at 4.8%. Combating the returns on SSBs of 3.06%, will you really be growing or losing your money?

👎🏼 Opportunity Cost ; Investing in SSBs with fixed returns may mean you may miss out on potentially higher returns from other investments that have the potential to outpace inflation. Younger investors, such as yourself, with a longer investment horizon should consider other investment options with higher growth potential to help combat inflation over the long term.

👎🏼 Interest Rate Environment ; The interest rates offered by SSBs are influenced by prevailing market conditions and monetary policy. In a rising interest rate environment, the fixed returns offered by SSBs may become less attractive compared to other investments that offer higher yields to compensate for inflation.

💵 TREASURY BILLS :

- Same goes for T-Bills. Let’s talk about the returns first. Their returns as stated on the website averages around 3.75%. The same question applies to this. With inflation soaring around 4.8%, will you really be growing or losing your money?

- It is also another product good for retirees as it’s short term and focuses on capital preservation as well. What young investors need now is long-term investments, to let the art of compounding interest work itself. Not short-term investments.

PROS -

👍🏼 Safety ; Treasury bills are backed by the government's full faith and credit, making them one of the safest investments available. There is virtually no risk of default on T-bills, making them an attractive option for investors seeking capital preservation.

👍🏼 Liquidity ; T-bills are highly liquid securities, which means they can be easily bought and sold in the secondary market. Investors can typically sell T-bills before maturity without incurring significant transaction costs, providing flexibility and access to funds when needed.

👍🏼 Short-Term Investment ; Treasury bills have relatively short maturities, in most cases, 6 months. This makes them suitable for investors looking for a short-term, low-risk investment option, as well as for those who need to park cash temporarily.

CONS -

👎🏼 Reinvestment Risk ; Since T-bills have short maturities, you may face the challenge of reinvesting the principal at a lower interest rate when the bills mature. This can be a concern when interest rates are declining, as you may have to settle for lower yields on your reinvested funds.

👎🏼 Low Returns ; While Treasury bills are considered safe investments, they also tend to offer lower returns compared to other investment options with higher risk profiles. Young investors such as yourself with a long investment horizon may seek higher returns to maximize growth potential over time, and T-bills alone may not provide the level of return needed to meet long-term financial goals.

👎🏼 Inflation Risk ; Treasury bills may not provide a sufficient hedge against inflation, especially during periods of high inflation. The fixed interest rates on T-bills may not keep pace with rising inflation, potentially eroding the purchasing power of the returns over time. Young investors with a longer time horizon may need to consider investments that offer higher potential returns to offset the impact of inflation on their investment portfolio.

👎🏼 Limited Growth Potential ; While T-Bills provide safety and stability, they may lack the growth potential needed to build wealth over the long term, especially for young investors with a higher risk tolerance. You may seek investments with higher growth potential to capitalize on compounding returns and achieve your financial goals.

Now, with all of that mentioned, these are the reasons as to why I personally don’t do T-Bills or Bonds! I personally invest and grow my money in other instruments that I believe will help me achieve my financial goals better. If any of you are interested in learning more about what instruments I personally invest in, do let me know!! I’d be more than happy to share :))

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