In October I posted a blog highlighting the opportunity cost of T-bills. The approximately 4% yield in treasuries seemed like a slam dunk, but there was a hidden opportunity cost worth considering. Let’s take a fresh look at how bills, bonds, and stocks have done since October and what we should learn.
Notes
Asset class performance since October
T-bills: 6 months of a 4% annualized rate. Netted 2% interest
10-year treasury: IEF 6 months of a 4% annualized rate. Netted 2% interest
Bought stocks: S&P 500 up $40 since then ($40/$360). 11% price increase + 1% dividends. Netted 12% ROI.
What about now?
T-bills: 5% interest
Stocks: ?
The premise is that I’m trying to build wealth net of taxes and inflation and I have a long time horizon.
Stocks still better for the long run.
- Stocks have generated well above 5% long-term average annual returns. Since 1926, S&P 500 up 10% per year.
- Inflation is still around 6.5% annually.
- Net of inflation, T-bills are yielding -1.5%
- Net of inflation, Stocks are yielding 3.5%
- Taxes
- T-bills are taxed at your ordinary income bracket (30%)
- SPY long-term capital gain (15%)
- Interest on T-bills is fixed (Fixed income).
- The dividend yield on stocks rises over time (rising income)
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