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4 Things to Buy Instead of Treasuries

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The U.S. government will probably come to its senses and raise the debt ceiling rather than choose voluntarily to default on its debt and potentially spark a worldwide financial disaster. But regardless of what you think about the collective intelligence of the U.S. Congress, you might not want to take the risk of investing in Treasury securities right now.

Big risk, no return
The argument against owning Treasuries is really quite simple: the potential reward really isn't worth the danger of having them in your portfolio. On the reward side, you can't get a 3% return from a Treasury bond -- before taxes and inflation -- without tying up your money for 30 years. Short-term Treasury bills yield a whopping 0.01%. That's right: a single dollar every year in interest on a $10,000 investment.

So why is anyone buying Treasuries right now? Treasuries still have the perception of being low-risk. After the stock market tanked and lost more than half its value between late 2007 and early 2009, it's hard to blame shell-shocked investors for thinking that preservation of capital is worth almost any price. But Treasuries do have risk, including the potential for devaluating their purchasing power through inflation, capital losses from rising interest rates, and, of course, that default bogeyman hanging over everyone's heads right now.

If you want to bail on Treasuries, what should you buy instead? Here are several good alternatives to consider:

1. Foreign bonds
The U.S. is far from the only country having trouble with its debt. But if you want the relative security of government bonds without putting all your eggs in the U.S. basket, foreign bond funds can spread out your risk.

You can find many funds that specialize in foreign bonds. Two closed-end funds, Templeton Global Income (NYSE: GIM  ) and Templeton Emerging Markets Income (NYSE: TEI  ) , own substantial portfolios of various government bonds. In addition, the SPDR DB International Government Inflation-Protected Bond ETF (NYSE: WIP  ) specializes in owning bonds similar to U.S. TIPS, whose principal value moves with inflation.

2. Junk bonds
High-yield bonds are controversial. On one hand, their rates are a lot higher than Treasuries. But junk issuers like Petrohawk Energy (NYSE: HK  ) run much higher risks of defaulting on their bonds than the U.S. Treasury. The question is whether you get enough in return to justify the risk.

The right mix of bonds may be just the ticket. SPDR Barclays High Yield Bond (NYSE: JNK  ) yielded more than 8% as of June 30, with bonds of companies like CIT Group and AIG among its top holdings. At least with a bond ETF, one default won't torpedo your entire portfolio.

3. Dividend-paying stocks
Even further out on the risk spectrum are stocks. But with many companies enjoying top credit ratings, including Johnson & Johnson (NYSE: JNJ  ) and Microsoft (Nasdaq: MSFT  ) , investors get paid very little for their debt. By contrast, their dividend yields are higher than the interest rates they pay on many of their bonds.

Dividend stocks aren't without risk. But they give you something bonds don't: growth potential. If you think the odds are better that megacaps like J&J and Microsoft will hold their own or grow than that they'll shrink and fade away, then their stocks may well make a much better investment -- especially over the long run.

4. Bank money market accounts
Anyone who takes 0.01% on their money is wasting their time. Although 1% may not sound like much more, you can get that rate from a number of banks -- and with FDIC insurance, they're backed by just as much government faith and credit as Treasuries.

Face it: you need some liquid cash to get by. That doesn't mean it shouldn't work hard for you. Low rates have hurt savers, but you can still make the best of a bad situation.

You should own all these anyway
The debt ceiling crisis may have piqued your interest in Treasury alternatives, but you can feel comfortable having a mix of all four of these types of investments in your portfolio at all times. By keeping your holdings truly diversified, you'll put yourself in the best position to handle whatever happens.

I didn't mention one popular way to protect against Treasuries: buying gold. But interest in gold has never been higher, and a special free report from the Fool has uncovered one tiny gold stock that's digging up massive profits. See it by clicking here.

Tune in every Monday and Wednesday for Dan's columns on retirement, investing, and personal finance. You can follow him on Twitter here.

Fool contributor Dan Caplinger still has some Treasuries from an earlier, better time. He doesn't own shares of the stocks mentioned in the article. The Motley Fool owns shares of Microsoft and Johnson & Johnson. Motley Fool newsletter services have recommended buying shares of Microsoft and Johnson & Johnson. Motley Fool newsletter services have recommended creating a diagonal call position in Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (10) | Recommend This Article (23)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 18, 2011, at 7:36 PM, djkumquat wrote:

    option #3 is the only one that appeals to me.

  • Report this Comment On July 18, 2011, at 9:09 PM, vidar712 wrote:

    @djkumquat

    I agree.

    The only thing that gives me pause is if Congress chooses to default and send the world into an 'Economic Armageddon of Death and Despair' then option #4 would have some merit. Having money on the sideline would allow you to buy stocks at post-default prices.

    Or, you could use the money to buy a gun to fight off the Economic-Armageddon zombies.

    You would have to choose based upon your time horizon, waiting for the market to recover might not be a good choice if the zombies are after your brains.

  • Report this Comment On July 18, 2011, at 9:31 PM, vens wrote:

    Is JNK a good idea? Wouldn't you rather have a smart manager checking the high-yield market? Unlike broad equities indices, there is greater chance of a junk issuer going belly up.

    Thus I think this is an exception to the general wisdom that for the vast majority of investors, exposure to the stock market should be stictly limited to indexing.

  • Report this Comment On July 19, 2011, at 7:44 AM, TMFGalagan wrote:

    @vens -

    I think the answer to that depends on whether you think your active fund manager is actually smart. At least with an ETF like JNK, you know on a daily basis what you're getting yourself into.

    best,

    dan (TMF Galagan)

  • Report this Comment On July 19, 2011, at 7:59 AM, dbtheonly wrote:

    ak,

    You forgot your meds.

    TMF Galagan,

    I've got 50% of everything stopped at about another 3% drop. I've got the remaining 50% stopped at another 10%. One doesn't have to be paranoid to allow that they might really screw things up this time.

  • Report this Comment On July 19, 2011, at 1:44 PM, FleaBagger wrote:

    Not raising the debt ceiling automatically means default? Does cutting spending count as default? Surely there are things that might be slightly more politically viable to cut than contractual obligations to Treasury holders?

    The basic premise of this article strikes me as unrealistic. Of course, the fact that there will be no outright default does not change the fact that U.S. treasuries are the worst investment in the world.

  • Report this Comment On July 19, 2011, at 2:02 PM, JCashForever wrote:

    I'm having a tough time believing that this article is serious.

    Going from treasuries to junk/foreign bonds is like going from the kiddie pool to Class IV whitewater. It is a big move up the risk scale...which is fine, but that should be stated explicitly at the start.

    I would think that most folks who invest in treasuries are risk adverse...that is, "Goal Only" is preservation of capital. So if they're thinking straight, the process that led them to treasuries won't lead them to junk/foreign bonds. It just won't...and it shouldn't, unless they've recalibrated their appetite for risk.

  • Report this Comment On July 19, 2011, at 2:09 PM, TheGreatFoolish1 wrote:

    @dbtheonly

    Unless we have another flash crash and your stop ends up getting taken out at 50% lower....

  • Report this Comment On July 19, 2011, at 3:11 PM, ivanhoe292 wrote:

    Man o' man...

    My company faced default and the first thing THEY thought of was CUTTING WAGES!

    Now all we hear about is no SS checks and no payout on treasuries.

    How about we hold up the payroll for a few weeks?

  • Report this Comment On July 19, 2011, at 5:15 PM, TMFGalagan wrote:

    @JCashForever -

    One point of the article is to challenge that conventional assumption. If foreign governments are more stable financially than the U.S., then their bonds would be better conservative investments than Treasuries. Just because it's never been that way before doesn't mean it will never be.

    With riskier corporate bonds, the idea is different: Treasuries don't compensate you for their risk, while junk bonds at least give you a better yield. Sure, they have even more default risk than Treasuries. But the idea that Treasuries will automatically preserve capital is dated - especially for the many investors who choose bond funds rather than buying individual Treasuries.

    best,

    dan (TMF Galagan)

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Dan Caplinger
TMFGalagan

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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