Should You T-Bill And Chill?

T-Bills are an incredibly attractive option at this time. At 5.5%, you’re getting high income, high principal stability and tax efficiency across very predictable short-term time horizons.

These are the highest rates we’ve seen since the mid-2000s, so it’s a welcome change from the 10 years of ZIRP (zero interest rate policy). In recent months, I’ve heard the term “T-Bill and chill” more and more often.

This refers to the strategy where you just move everything into T-Bills and “chill”.¹ This move sounds increasingly enticing.

After all, 5.5% with no state taxes is a pretty darn good deal for a risk-free return. But here are some things to consider before getting lured into this sort of drastic move:

1. Shifting your portfolio like this is more akin to gambling than investing.
2. You have a significant amount of reinvestment risk.
3. Consider your time horizons and personal asset-liability mismatch.

Shifting your portfolio like this is more akin to gambling than investing. John Bogle was the king of passive investing. But even the king was active to some degree.

For instance, he liked to rebalance his portfolio for behavioral reasons. When the stock market was grossly overvalued, he said he tilted his portfolio to 25/75 stocks/bonds.

When the stock market fell substantially, he’d do the opposite. He didn’t consider it market timing. It was just good old rebalancing. That is, after all, what rebalancing does – it reduces the risk in your portfolio that comes from your high growth portfolio components as they inevitably outperform and become a larger part of your portfolio.

Bogle took this a step further by overbalancing at times. It’s the same thing we do with our Countercyclical Indexing approach.

But the most important part of this is that you’re always fully invested. Bogle liked to say “stay the course”. You are never moving all in or all out of positions.

In doing so, you always have some exposure to stocks and bonds just in case you’re wrong. What overbalancing does is keep your fully invested, but fully invested in a lower volatility portfolio at certain times where you’re especially uncomfortable with valuations or the broader economic outlook (we would argue this is certainly one of those times).

This isn’t a “beat the market” approach to investing. It’s a behavioral finance tool to keep you in the game. And in fact, it could very well result in lower returns, but what it avoids is making drastic moves that leave you sitting on the sidelines for extended periods of time without a plan to get back into the game.

You have a significant amount of reinvestment risk. That behavioral tool is important because making a drastic move to 100% T-Bills would result in substantial reinvestment risk.

For example, rates are 5.5% today, but what if the economy keeps humming along, the stock market never crashes and the Fed eases rates back to 2% over the next few years?

Then you’ll find yourself sitting in a portfolio of low-yielding T-Bills as you reinvest at lower and lower rates. And you’ll be sitting around scratching your head about how to get back into the stock market at that point as the stock and bond markets outperform T-Bills.

Consider your time horizons and personal asset-liability mismatch. I like to think of T-Bills as specific duration instruments. In our Defined Duration strategy, T-Bills are a 0 duration instrument. They’re a cash equivalent.

So they should be matched with potential short-term liability needs (emergency funds, monthly and annual expenses, etc.). But bear in mind that you don’t only have short-term financial needs.

You have medium and long-term financial needs as well and T-Bills will not properly fund those needs. But if you need a little extra behavioral insurance to keep you comfortable, I think they can fill in as a form of insurance when they have a positive real return like they do today. But be careful being too overweight T-Bills.

This ties all of the above comments together. T-Bills are inherently short-term instruments. They are very unlikely to outperform stocks and longer bonds over longer periods of time.

So you have to be mindful about how you match certain assets with certain time periods in your portfolio. You should never be fully invested in short-term instruments because that creates an asset-liability mismatch over time where you don’t own longer duration higher yielding instruments that help you beat inflation over time.

Remember, short duration instruments like T-Bills are great short-term principal stabilizers and terrible long-term inflation hedges, while longer duration instruments like stocks tend to be excellent long-term inflation hedges and terrible short-term principal stabilizers.

This is, interestingly, also why you don’t want to ever be 100% stocks. Being 100% stocks results in the opposite version of the asset-liability mismatch where you then only own super long duration instruments and if you find yourself in need of liquidity at an inopportune time, you become a forced seller of the long duration instrument to meet a short-term liquidity need.

Proper diversification is not just about having a good mix of different assets. It’s also about having a good mix of different assets across proper time horizons.

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