Financial Competence Tag's Archives
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Treasuries can be considered as the safest investments in the world and they earned a good reputation from that.
Treasuries are backed by “the full faith and credit” of the U.S. government. The risk of default on these fixed-income securities is NIL. Not even the safest corporate bond in the world can make that claim. If you’re primary goal is to not lose money, treasuries are for you. When you buy a Treasury Bill, Bond or Note you’ll get your interest payments and you’ll get your principal back.
They are not a risk-free. There are, in fact, two very clear risks to holding Treasuries.
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In most financial textbooks, they advise diversifying your funds into many different investment vehicles like bonds, stocks, mutual funds, money markets instruments as well as spreading your money across numerous different sectors and different countries to diversify your risks. To an average investor who has low financial competence and needs the wide diversification to lower risk, this makes sense. However, while this kind of broad diversification guarantees low risk, it also guarantees low returns of 5%-8%.
Don’t follow those strategies. Warren Buffett advises that ‘broad diversification is used by people to protect themselves against their own ignorance.’ If you know what you are doing (high financial intelligence), you should concentrate your portfolio into equities (stocks & mutual funds) as they achieve the highest return. And you can achieve low risk not by simply spreading your money around, but by your competence of knowing which funds and stocks to pick.
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