The Case for Simplicity: Why U.S. Treasuries and Familiar High-Risk Investments Make More Sense

When managing investments, the primary objective should always be clear: to balance safety, growth, and transparency. In today’s financial markets, there are countless products and strategies marketed to investors, promising yield, diversification, and stability. Among these, one such offering is the “crossover bond strategy,” which blends high-yield (HY) and investment-grade (IG) bonds. While the concept sounds compelling, it comes with risks that may not align with the expectations of many investors.

Instead, a simpler and more effective approach is to use U.S. Treasuries (UST) as the foundation of your portfolio and pair this with high-risk investments that you fully understand. This essay explains why this approach makes more sense and why avoiding complex bond strategies is often the better choice for long-term success.

U.S. Treasuries: A Stable Base

U.S. Treasuries are often referred to as the “gold standard” for fixed-income investments. Their appeal lies in their simplicity, safety, and reliability.

1. Predictable Returns:

USTs currently offer yields around 4.5% over the next 10 years, providing a stable income stream. Unlike high-yield bonds, Treasuries are backed by the U.S. government, ensuring there is virtually no risk of default.

2. Capital Preservation:

The primary role of fixed-income investments in a portfolio is to preserve capital and provide a counterbalance to riskier assets. Treasuries fulfil this role perfectly. They are resilient during market downturns and act as a safe haven in times of uncertainty.

3. Liquidity:

USTs are among the most liquid assets in the world. This means you can easily buy or sell them without worrying about steep discounts, even during periods of market stress.

For clients seeking a stable and secure foundation for their investments, U.S. Treasuries remain unparalleled. They provide peace of mind, allowing you to take calculated risks in other areas of your portfolio.

The False Sense of Safety in High-Yield Bonds

High-yield bonds, often called “junk bonds,” and crossover strategies that mix HY and IG bonds are frequently marketed as offering the best of both worlds—higher returns with manageable risks. However, these strategies come with inherent flaws:

1. Default Risks:

High-yield bonds carry a significant risk of default, especially during economic downturns. Even if only 30% of your portfolio is allocated to HY bonds, a few defaults can disproportionately drag down overall performance.

2. Volatility:

Lower-rated bonds behave more like equities during market turmoil. Their prices can fluctuate sharply, undermining the perceived safety of a bond portfolio.

3. Limited Upside:

While HY bonds may offer yields around 6.9%, the additional return over Treasuries is modest. When you account for the potential losses due to defaults or market stress, the risk-return trade-off becomes far less attractive.

4. Liquidity Concerns:

Unlike Treasuries, high-yield bonds can be difficult to sell in stressed markets. This lack of liquidity amplifies risks for investors who may need access to their funds quickly.

By allocating to crossover strategies, investors may believe they are diversifying, but in reality, they are taking on equity-like risks without the same potential for significant capital appreciation.

High-Risk Investments: Focus on What You Know

If you’re going to take risks in your portfolio, it’s better to allocate that capital to investments you understand well—where you can analyse, predict, and manage risks effectively. For example:

1. FX Trading:

Currency markets can be volatile, but with the right tools and expertise, FX trading offers opportunities to capitalise on market inefficiencies. Unlike high-yield bonds, FX markets provide greater transparency and liquidity.

2. Technology Stocks:

Tech equities, though risky, have substantial upside potential. Over the long term, investments in innovative companies can offer returns far beyond what is possible with high-yield bonds.

3. Structured Products:

For clients with specific risk-reward preferences, tailored products like knock-out options or equity-linked notes can provide exposure to high returns while defining the downside in advance.

The key is familiarity. By focusing on high-risk investments you understand, you maintain control over your portfolio, avoiding unnecessary complexity and opaque risks.

Clear Segmentation: Safety vs. Risk

A successful investment strategy requires clear boundaries between safety and risk:

• Safety Bucket: Anchor your portfolio with USTs and high-quality IG bonds to ensure stability and income.

• Risk Bucket: Allocate a smaller portion of your portfolio to high-risk, high-reward assets like FX, equities, or other speculative instruments you understand deeply.

This separation ensures transparency for clients. They know exactly which part of their portfolio is designed to preserve capital and which part is meant to pursue higher returns.

Educating Clients: The Importance of Transparency

One of the biggest risks of complex strategies like crossover bonds is that they create a false sense of safety. Clients may believe they are investing in a bond portfolio that is inherently stable, only to experience equity-like volatility during market downturns. This undermines trust and can lead to poor decision-making during times of stress.

As an adviser, your responsibility is to ensure clients understand the risks and rewards of their investments. By recommending simple, transparent strategies—like USTs as a base and familiar high-risk investments—you build trust and align with their expectations.

Conclusion: Simplicity Wins

In a world of increasingly complex financial products, simplicity is often the most effective strategy. By using U.S. Treasuries as the cornerstone of your portfolio and allocating to high-risk investments you understand, you can achieve a balance of stability and growth. This approach avoids the pitfalls of high-risk bond strategies while providing clients with clarity, confidence, and consistent returns.

Ultimately, the goal is not just to generate returns but to ensure that every investment decision aligns with your clients’ goals, risk tolerance, and understanding. Simplicity and transparency should always come first.