Parking your fixed-income assets in cash may seem like a safe choice in today’s volatile investing environment, but it’s actually a risky proposition. Here are three reasons why sitting on the sidelines can be a dangerous game.
First, the opportunity cost is huge. While you’re rolling Treasury bills and waiting for the right time to reenter the market, you’re losing out on the daily income accrual provided by higher-yielding bonds. Today, the U.S. high-yield market offers yields of 8.5 percent, on average, compared to one- to three-month T-bills at 4.9 percent. Remember, fixed-income returns are mainly derived from earning income with the passage of time.
Second, you can’t keep up with inflation. Even though T-bills are yielding more than they have in a long time, they still struggle to keep up with inflation. Today, T-bills yield 4.9 percent — the same as U.S. headline inflation and well below inflation levels in Europe and elsewhere.
Third, timing