Should I Invest in Government Backed Securities?
When you begin thinking about investing your money, your mind may immediately turn to the stock market. Stocks have become more accessible in the last few years, with apps like Robinhood making it easy for the average person to quickly buy shares online. However, the stock market has taken a few steep drops in recent months, and some investors are considering moving their money into bonds. Let’s take a look at the difference, and if you should consider investing in government backed securities.
What are Government Backed Securities?
Government backed securities are presented as different types of investments, but they all are backed by the “full faith and credit” of the government. These securities are sold to investors to fund operations and expenses, such as the military budget and infrastructure projects. Think of it as taking a loan out to buy a car. The bank purchases the car for you, and then you owe them that money plus interest over a predetermined period of time. Government backed securities work in a similar way. You purchase a bond from the government, and they pay you back over time with interest. There are three main varieties of government backed securities, or U.S. Treasury Bonds, including:
Treasury Bills
These are short-term securities that have maturity dates of only a few days and are non-interest bearing. You can buy these at a discount and in return are paid the full face value at the mature date, typically anywhere from one month to a year.
Treasury Notes
These are fixed-principal securities with slightly longer maturities than the previous, between two and ten years. The interest on these notes are paid semi-annually, and the principal is paid at the maturity date.
Treasury Bonds
These are long-term, fixed-principal securities with the longest maturity date of the three, thirty years. Like Treasury notes, interest is paid semi-annually, while the principal is paid on maturity.
Stocks vs. Government Backed Securities
Stocks and bonds differ in many ways, but the two biggest differences are the risk and return expected by the investor.
By purchasing a stock, you are purchasing a piece of equity ownership in that company. For this reason, stocks have unlimited growth potential, but a significantly higher risk. When an investor looks into purchasing stock, their goal is to buy low and sell high. Once a stock is purchased, they can either trade that stock or gold it for an extended period of time. Both methods have their benefits, and rely on the proper fluctuation of prices to make money. If the price does not fluctuate as predicted, the investor could potentially lose money, with little to no way to recoup it.
Bonds on the other hand allow you to buy the issuer’s debt, making them much less risky, but with significantly less upside. When an investor purchases a bond, you are lending money to the issuer, in this case, the government. The issuer promises to pay you interest on that amount, as well as the full face value upon the maturity of that bond. Unlike stocks, government backed bonds carry the full faith and credit of the government, making them a much safer investment.
Why Might Government Backed Securities Be More Beneficial?
It’s important to remember that bonds should not fully replace stocks for those wanting to invest. The amount you invest in each of them, however, should change over time with the market. In the current market, both treasury notes and stock are dropping to all time lows, and investors are considering bonds to maximize safety. The return on a bond, while not as high of a ceiling as a stock, can still be decent without the major risks. In major recessions, bonds can be a shock absorber for investors, as bond allocations were proven to have saved people during the 2008 financial crisis.
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Regardless of if you choose to stick with stocks or decide to invest in bonds, remember that keeping too much of your money in one place is risky. If you’re still unsure if investing in Government Backed Securities is a beneficial move for you, talk to an experienced financial professional about your investment expectations. The Carty Team can help you determine what your goals are and the best way to reach them.
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