Investing is all about risk versus reward. When you take on higher levels of risk, you typically have an opportunity to receive greater rewards. And vice versa.
But there's always a balancing act involved. At times, you can obtain relatively attractive returns with low risk. Right now is one of those times. With U.S. Treasury yields over 4% right now, should you invest in stocks at all?
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Safe and easy
U.S Treasury bonds are widely regarded as the safest investment alternative to be found. They're backed by the full faith and credit of the U.S. government. The entire global economy would be in major trouble if the U.S. government ever failed to pay its debt.
If you hold Treasuries until their maturity, you're guaranteed to get back your full investment amount plus any interest accumulated. There is a risk, however, that you could lose money if you need to sell the bonds before they mature.
These bonds weren't all that attractive to investors when they delivered yields below 2%. However, there are now several types of Treasury bonds that currently offer much higher yields.
For example, you can invest in four-month and six-month U.S. Treasuries with yields of more than 4.8%, as of the time of this writing. All U.S. Treasuries with a duration of two years or less have yields of at least 4%.
Investing in Treasury bonds is easy. You can buy them through your online brokerage. You can also buy them online via the U.S. Treasury Department's TreasuryDirect website.
The case for stocks
Why would anyone even consider buying stocks with essentially risk-free returns of at least 4% available with Treasury bonds? There are some near-term and long-term reasons.
The stock market could provide even more attractive buying opportunities in the near future. One recession indicator recently flashed its biggest warning since 1981. If the U.S. economy enters a recession, stocks will likely fall.
The value of Treasury bonds could decline, as well. If they did, you could have less money to buy stocks at bargain prices. This is especially a factor to consider before buying Treasuries with longer durations.
Income investors who are willing to take on additional risk can get even higher near-term yields with some stocks than U.S. Treasury bonds offer. As a case in point, my own personal portfolio includes 12 high-yield stocks. Eight of them currently offer significantly higher yields than the highest-yielding Treasury bond does.
Arguably the most important reason to buy stocks, though, is that they historically offer greater long-term returns than Treasury bonds do. Investing in high-quality stocks with reasonable valuations should pay off more over the long run than Treasuries will -- even ones with yields of over 4%.
Not a binary decision
The good news is that investors don't have to choose between Treasury bonds and stocks. It isn't a binary decision. You can invest in both.
Actually, a hybrid approach could be the best option for many investors. It's wise not to put any money that you might need within the short term or even over the next five years in stocks because of their inherent volatility. With Treasuries yielding more than 4%, they're a good candidate for these short-term and intermediate-term funds.
Stocks will likely be a better place to invest money targeted for retirement or long-term plans. Remember that investing involves a continual trade-off of risk and potential rewards. Those risks include missing out on opportunities for greater long-term returns.
