Treasury bills: a good investment in 2022?
by: JOHN DOE
on: DECEMBER 2, 2022
in: BLOG
The first step many millennials in Nigeria want to take before they start investing is to think about the safest and least risky strategies to build their money. Reasonably speaking, if you fall into this category, Treasury bills may just be your best bet.
What are treasury bills and how do they work?
Treasury bills are one of the safest and most conservative investments since they are backed by the government. Treasury Bills or T-bills are short-term financial instruments, (in this case, debt obligations backed by the government) typically with a maturity period
of one year or less.
When an investor buys a Treasury Bill, the government is essentially writing an IOU to the investor because the government typically issues Treasury Bills to support various public initiatives, such as the construction of schools, hospitals, highways, etc.
Typically, Treasury Bills are held until their maturity date. However, some holders could prefer to cash out before maturity and take advantage of the benefits from the investment's short-term interest by reselling it on the secondary market.
What to consider before investing in treasury bills
Even though Treasury bills are one of the safest assets, you need to recognize that their returns are low compared to those of other investments. Opportunity cost and your personal risk appetite should be considered when determining whether Treasury bills are a good fit for your investment portfolio.
It is also a wise bet to consider that Treasury bills may be an appropriate choice for investors who are planning toward retirement.
1. Opportunity cost
In microeconomic theory, an opportunity cost is a value or benefit given up by engaging in that activity, relative to engaging in an alternative activity. In simpler terms, it means that if you choose one activity, you forfeit the chance to do another. Opportunity cost needs to be considered in investing especially when your resources are limited. The opportunity cost of investing in Treasury bills shows up as unrealized returns that could have been obtained in other parts of the market.
2. Risk appetite
There are a number of factors that could affect your appetite for higher-risk-higher-reward investments or lower-risk-lower-reward investments. Some of these factors include objectives, timeline, age, portfolio size, proximity to retirement, comfort level, etc.
Investors planning for retirement typically allocate a large portion of their portfolio to income-producing, conservative investments to protect their “nest egg”.
3. Timeline
As we said earlier in this article, treasury bills are government security with maturity dates ranging from 4 weeks to 52 weeks. Of course, investors can cash out before the maturity date, however, it is important to consider how long you can go having your money tied up
in an asset.
So, with all that was learned today, do you think that treasury bills are still a good investment in 2022?
Treasury bills could be a good investment for those looking for safety and fixed interest rates. These bills are an important piece of an investment portfolio's asset allocation since the steady return helps offset the volatility of equity prices.
Investors who are closer to retirement tend to have a larger percentage of their portfolio in treasury bills, while younger investors may have a smaller percentage. Either way, when considering whether treasury bills are a good investment or not, you must first weigh the opportunity cost, your risk appetite, and how long your money will be tied up.
