why do people with mutual funds and retirement funds invest in US securities?

Question

Because they feel the US government is a safe investment? Why?

Answer 1

When you say US securities, you are most likely referring to domestic US stocks which has nothing to do with the safety of the US government. A vast majority or mutual funds and retirement funds are invested in US stocks and bonds, and sometimes also US Treasuries (which are specifically obligations of the US govt).

The reason for this is because the US stock market and bond market are the deepest and most liquid markets for traded securities and that is why vast majority of funds are invested in the US markets. I believe there are many more equities-based mutual funds than bond or gov't funds.

Also, now European exchanges and emerging markets are becoming more popular, but it is the liquidity, diversity, historical track record and depth of the US markets that make them a defacto part of index, mutual and other retirement funds.

Answer 2

Are you referring to government-issued bonds, like Treasury bonds?

Bonds issued from the government are often backed by the taxing power of that government. In other words, they rarely default because they can simply extract the necessary payments from the tax-payers. Bonds issued from the U.S. Treasury department are considered the "safest" investment, in terms of default. Treasury bonds are also the most widely traded security in the world. There is more money in Treasury bonds than any other specific security in the world.

Bonds should be a part of anyone's retirement funds, regardless of their age. Generally, it is recommended to hold less bonds at an early age and gradually shift more money into them as you age ... but you need at least some at any point. This is because bonds are not always correlated with stocks, and holding some bonds reduces your overall portfolio's volatility. In fact, academic studies show that your stock to bond ratio is the most important factor.

An integral part of anyone's bond portfolio should be Treasury bonds. This is because they pay relatively well even though they are of impeccable quality.

Answer 3

The only US Government defaults have been technical defaults. US Government securities are safe because the Government could simply print money to pay for them. Of course, if it did that, the hyperinflation would destroy the value of the dollar. In that scenario, stocks would quickly crash and corporate bonds would be nearly worthless.

Further, T-bills have approximately an inflation rate of return. You cannot get ahead, but you also cannot lose. Likewise, many people are very patient with their money and are willing to accept less with the knowledge they will receive their goal someday.