Here’s our Club Mailbag email investingclubmailbag@cnbc.com — so you send your questions directly to Jim Cramer and his team of analysts. We can’t offer personal investing advice. We will only consider more general questions about the investment process or stocks in the portfolio or related industries. This week’s question: Why invest in stocks if the 10-year and 2-year Treasury notes give great returns without risk? Given all the uncertainty this year and with yields rising, why not sit this year on the sidelines holding bonds? Thanks, Eli L. Moving to bonds in the face of rising yields is certainly an option, and it is true that the recent run up in yields pressured the equity market. But nothing is permanent, as we saw this week with yields falling on the back of two encouraging inflation reports, which helped the major U.S. stock benchmarks to post a strong week. Another thing to keep in mind: Rising bond yields actually mean that bond prices are falling — the two move inversely to each other. Moreover, unlike dividend-paying stocks, where the payout can (and likely will) increase over time, the yield realized on a bond security is locked in upon purchase. Sure, the yield quoted on the bond you own may go up or down as prices fluctuate, but the yield-to-maturity — meaning the annualized return realized between purchase date and maturity — is unchanged. The price of the bond will decline as the yield increases. Furthermore, it’s important to note that equity prices will almost certainly move higher before it becomes clear that bond yields are definitively trending lower. It’s still a bit early to draw that conclusion based on the recent action. Remember, investors are trying to skate to where the puck is going. Applying that concept to equity prices and bond yields, it means that if you’re game is to trade in and out of the market based on interest rates, then you are trying to time the peak in yields. There is significant uncertainty out there, as you noted, meaning that accurately calling the peak in yields ahead of time — before the equity market starts to sniff it out — is going to be difficult, to say the least, and nearly impossible to do consistently over time. Sitting in a money market fund is another option. The yield on a money market fund won’t be locked in upon purchase — because they invest in short-term Treasury bonds, which fluctuate in value — but they are designed to be liquid. You’re able to collect the yield and not worry about any declines in the face value, unlike if you’re holding bonds directly. This means that you can cash out 100% of what you put into the money market fund at any time. Nothing comes without risk, though. Even if you were to store your cash in the mattress and avoid financial markets all together, you are taking on risk. In that case, the risk is that you never reach your financial goals. After all, inflation will eat away at your buying power whether you participate in global financial markets or not. There also are many risks to consider when it comes to bonds. Default risk is perhaps the most obvious, though that’s less of a concern with a Treasury bond. Another major one to consider is duration risk, which is defined as the amount a bond price is expected to fluctuate given a change in interest rates. We wrote about duration risk back in early 2023 after it blew up Silicon Valley Bank. Still, investors must do what’s best for their own situation, and if moving to the sidelines seems like the right call to somebody , who are we to suggest otherwise? It’s not a move we’re looking to make as a Charitable Trust, but for the individual investor, the right move is often the one that lets them sleep easiest at night. Just be sure to consider time to maturity. Buying a 10-year Treasury note with the intention to sell after one year will open you up to increased duration risk compared with purchasing a shorter-term security, such as a 1-year Treasury note. You could also stick with a money market fund or something in the middle of the two, like a certificate of deposit. More active investors may want to try their hand at this level of active trading, making large moves into and out of given asset classes. However, for the majority of investors with a multi-year investment horizon, we’re steadfast in the belief that more money will be made by staying patient and focusing on corporate fundamentals, which ultimately will drive the long-term direction of an individual stock, rather than trying to hop in and out of the market based on macro dynamics such as interest rates or geopolitical happenings. This quote from the famed investor Peter Lynch, who crushed the S & P 500 while running Fidelity’s Magellan Fund from 1977 to 1990, comes to mind on this topic: “Far more money has been lost by investors in preparing for corrections, or anticipating corrections, than has been lost in the corrections themselves.” In other words, jumping out of the market in fear of a correction will likely cause you to miss more upside than you save on the downside by the time you finally avoid a correction successfully. (See here for a full list of the stocks in Jim Cramer’s Charitable Trust.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
A view shows a bronze seal beside a door at the U.S. Treasury building in Washington, U.S., January 20, 2023.
Kevin Lamarque | Reuters
Here’s our Club Mailbag email investingclubmailbag@cnbc.com — so you send your questions directly to Jim Cramer and his team of analysts. We can’t offer personal investing advice. We will only consider more general questions about the investment process or stocks in the portfolio or related industries.
This week’s question: Why invest in stocks if the 10-year and 2-year Treasury notes give great returns without risk? Given all the uncertainty this year and with yields rising, why not sit this year on the sidelines holding bonds? Thanks, Eli L.
