Do Stocks Outperform Treasury Bills (2024)

FAQs

Do Stocks Outperform Treasury Bills? ›

The answer to the question posed on the title of this paper is that most common stocks, (slightly more than four out of every seven) do not outperform Treasury Bills over their lives.

The majority of stocks that went public during 1975–2020 do not outperform one-month T-bills. Only 38.65% of the IPOs have a lifetime buy-and-hold return higher than T-bills.

The biggest downside of investing in T-bills is that you're going to get a lower rate of return compared to other investments, such as certificates of deposit, money market funds, corporate bonds or stocks. If you're looking to make some serious gains in your portfolio, T-bills aren't going to cut it.

Individual stocks may outperform bonds by a significant margin, but they are also at a much higher risk of loss. Bonds will always be less volatile on average than stocks because more is known and certain about their income flow.

This means that investors looking for high returns may not find T-bills attractive. Since T-bills have fixed interest rates, inflation can erode the purchasing power of the returns earned from these investments. This means that investors may need help to keep up with inflation, resulting in a decline in real returns.

A Treasury bill, or T-bill, is a short-term debt obligation backed by the U.S. Treasury Department. It's one of the safest places you can save your cash, as it's backed by the full faith and credit of the government. T-bills are auctioned off at a discount and then redeemed at maturity for the full amount.

Treasury Bills, or T-bills, represent short-term debt obligations by the Treasury. Because the U.S. government backs them, they are considered extremely low-risk, although they also have relatively low returns.

Taxes: Treasury bills are exempt from state and local taxes but still subject to federal income taxes. That makes them less attractive holdings for taxable accounts. Investors in higher tax brackets might want to consider short-term municipal securities instead.

"Long-term Treasury bonds may have no default risk, but they have liquidity risk and interest rate risk — when selling the bond prior to maturity, the sales price is sometimes uncertain, especially in times of financial market stress," it said.

At Berkshire's annual meeting, Buffett called T-bills “the safest investment there is,” saying he takes no chances with Berkshire's cash. Buffett has long favored T-bills with Berkshire's cash, even when they yielded close to zero from 2020 through 2022. Individual investors have been following Buffett's lead.

Why choose stocks over bonds? ›

Stocks offer an opportunity for higher long-term returns compared with bonds but come with greater risk. Bonds are generally more stable than stocks but have provided lower long-term returns.

In every recession since 1950, bonds have delivered higher returns than stocks and cash. That's partly because the Federal Reserve and other central banks have often cut interest rates in hopes of stimulating economic activity during a recession. Rate cuts typically cause bond yields to fall and bond prices to rise.

The historical returns for stocks have been between 8%-10% since 1928. The historical returns for bonds have been lower, between 4%-6% since 1928. 3 Over the past 30 years, stocks have returned an average of 11% annually; while bonds have returned just 5.6% per year, on average.

T-bills are known to be low-risk short-term investments when held to maturity since the U.S. government guarantees them. Investors owe federal taxes on any income earned but no state or local tax.

If you're saving for a goal less than a year away: If you're saving money for a goal with a short-time horizon, T-bills can make more sense than CDs. They provide a higher APY than savings accounts, and they're more liquid than CDs.

Are Treasury bills taxed as capital gains? Normally no. However, if you buy a T-bill in the secondary market and then achieve a profit, you may be liable for capital gains depending on your exact purchase price.

As we have explained in this article, this means that stocks and bonds go up at the same time. When bonds go up, stocks go up. Our backtest shows what happens to stocks when bonds go up: stocks perform better than any average period when long-term Treasuries go up.

We find that a majority of the IPOs have returns less than one-month T-bill rates at the monthly, annual, decade, and lifetime horizons.

A gain on the reissuance of treasury shares should be credited to additional paid-in capital. A loss on the reissuance of treasury shares may be debited to additional paid-in capital to the extent previous net gains from sales or retirements of the same class of stock are included in additional paid-in capital.