Equities and bonds are some of the main investment choices made available to retail investors.
Due to the special inverse relationship shared between stocks and bonds, both are used as a combination to construct a resilient portfolio regardless of economic climate and uncertainty.
However, when it comes to managing the ratio between equities and bonds, it not only boils down to the economic climate but also to personal preferential risk tolerances.
I remember just a few months back when the investing community is all abuzz with the T-bills, Singapore Government Securities (SGS) Bonds, and Singapore Savings Bonds (SSB).
I have never been a fan of fixed income, as broadly speaking, due to the limited upside. But it still is a valuable and useful asset for those who are risk aversive or looking to park their income when markets are bearish.
But when markets are apparently bullish, as of the time of writing, should you renew your T-bills or invest your money back in the stock market right now?
T-bill’s latest cut-off yield
Just last week, the cut-off yield on the latest six-month Treasury bill (T-bill) in Singapore rose to 3.89%, at the close of its auction on Thursday.
For those who are unaware, T-bills are short-term tradable Singapore government debt securities. It is risk-free and backed by the Singapore government and the latest issue’s application totaled $9.9 billion for the $5 billion on offer.
The previous auction’s 6-month tenor offers a cut-off yield of 3.84%. So cut-off yields are still on the rise in terms of trend, which ties back to interest rates and monetary policy.
One can try to bid for a higher yield, i.e. to place a competitive bid. The same T-bills can be categorized into 40% non-competitive bids and balance are competitive.
So long as the 40% non-competitive bids are not fully and over-allocated, the competitive bids will be filled based on the bids’ yield relative to the cut-off yield.
In high-interest rate periods like now, it is almost impossible to get an enticing competitive bid.
S&P500 & NASDAQ returns
Like it or not, we are in a bull market that few people believe in. YTD, the S&P 500 is up by almost 10%, while NASDAQ and QQQ are on a 30% homerun.
Tech stocks have been the surprise outliers, as stocks like Microsoft Corporation (NASDAQ: MSFT), NVIDIA Corp (NASDAQ: NVDA), and Apple Inc (NASDAQ: AAPL) are all trading at their all-time high.
This ties back a bit to my personal preference of always going long on stocks due to the uncapped upside. But if hindsight is 20-20, many would have forsaken safe assets and gone back into stocks when everything was still uncertain during the earlier spells of 2023.
Conversely, if markets were to remain uncertain or bearish, it is likely that stocks would be underperforming if compared to bonds and T-bills.
So take back your matured T-bills and plow them back into the market?
Will T-bills’ yield continue to grow, making REITs not worth the risk?
Or will the markets continue their elated move upwards again?
Knowing what will happen makes making decisions simpler. But then again, if that were to be the case, going for the winning numbers in TOTO makes more sense.
So we can only make some assumptions and some best estimates.
Is inflation still high? Yes. It has not come down to the 2% target. There will most likely be more rate hikes, and that benefits fixed-income securities.
How much more will stocks go higher? Honestly from a personal point of view, big tech’s rally was a bit of a surprise – firstly most corporates were either freezing or cutting headcount, and secondly, no one would have fathomed the positive catalyst that AI is bringing.
The recent bull market is running forward ahead while near-term skepticism and uncertainty still linger.
Things could go either way, but equities, especially tech, do not look cheap now.
It all boils down to personal risk tolerances
If you are risk aversive, there is no wrong in choosing to stay defensive at this moment. Returns on T-bills are as good as some REITs without the risk.
Conversely, for those who are in it for the long run, equities are still viable regardless of the short-term uncertainties.
If you are on the fence, well the good news is you can still have half of your cash in stocks while the other half in T-bills or other low-risk bonds. You are not required or forced to choose either one.
No one has the foresight of how low or how high a company can go. The only solace for an investor to find in a great company is that there are no big reasons or risks that the company should be trading lower for whatever fundamental reasons and catalyst.
That said, the caveat here is that not all companies are the same, be it fundamentally, technically, or even momentum-wise. So, know what you are buying, and how long is your holding period.
For me? It’s going to be stocks all the way no matter what happens…
