Stocks_Versus_Treasury_Bonds_Versus_Cash
00:00:00.000 | Hello, everybody.
00:00:01.280 | It's Sam from Financial Samurai and greetings from Sonoma, wine country, California.
00:00:07.360 | Our kids are out from school this week, so we decided to come up and it's actually snowing.
00:00:12.180 | That's pretty cool because I don't think my kids have seen snow yet.
00:00:16.200 | We're too afraid to drive up to Lake Tahoe, which is about three hours and 20 minutes
00:00:21.460 | on a very good day and maybe up to eight, nine hours on a bad day.
00:00:26.760 | That's a no-go with a three-year-old and a five-and-a-half-year-old.
00:00:31.840 | Sonoma and Napa Valley are only about an hour and a half away from San Francisco, so that's
00:00:38.000 | really smooth sailing.
00:00:40.380 | So in this episode, I want to talk about buying treasury bonds yielding over 5% because I
00:00:47.000 | published a post that was widely read by tens of thousands of people and I came back with
00:00:53.280 | some really good feedback from all of you on maybe why we shouldn't buy treasury bonds
00:00:58.240 | yielding 5% or why it's not that big of a deal that I didn't really think about and
00:01:02.840 | I got some good data points from various people.
00:01:05.240 | Then I have some more feedback from people who say, "Well, forget about treasuries because
00:01:10.400 | I'm willing to invest all of my capital in stocks or 95% plus, even as a retiree."
00:01:18.000 | I thought this was quite interesting feedback because that's definitely not my way.
00:01:23.400 | As I've gotten older and wealthier with more responsibility to children, I've decided to
00:01:28.400 | go more and more into capital preservation mode.
00:01:31.500 | For me, 5%, even with inflation at 6.2% or whatever it is right now, is pretty good because
00:01:40.580 | anything above 0% is a positive.
00:01:44.080 | Sure, I'm not making a real return, but that's better than losing 19% in the S&P 500 in 2022
00:01:52.760 | and not making a real return because you are doing a double loss of losing to inflation
00:01:58.200 | and losing real money in your stock investments.
00:02:02.800 | Now in 2023, it's rare to see consecutive down years in the S&P 500, but I do think
00:02:09.720 | 4,200 on the S&P 500 feels like the top, with the S&P 500 at around 4,000-ish.
00:02:17.520 | The forward P/E multiple is about 18 times, which is slightly above the long-term medium
00:02:22.920 | of about 16 times, but that's down from 20 plus times during the bubble year of 2021.
00:02:31.560 | We've made progress, but it still seems quite difficult to break out to another bull market
00:02:39.040 | with the Fed continuing to raise Fed funds rate.
00:02:42.200 | The terminal rate is probably going to go to 5.25% to 5.5% because the January CPI and
00:02:50.080 | PPI numbers were not as good as expected, so they were higher than expected.
00:02:55.720 | Retail sales was also really strong.
00:02:58.080 | Job numbers were also really high.
00:03:00.600 | So it seems like the Fed is going to raise interest rates for longer, and maybe they'll
00:03:05.860 | stop in May of 2023, and then they might keep the Fed funds rate at 5.25% to 5.5% for another
00:03:14.880 | six to 12 months.
00:03:16.600 | So that's longer than expected.
00:03:17.880 | That's longer than the S&P 500 rally we've had since October of last year was expecting.
00:03:24.640 | Therefore, there should be some downward adjustments to the S&P 500, which we've seen after it
00:03:31.120 | topped out at around 4,195, and then it recently has retrenched back to 3,986.
00:03:40.440 | But if you invest in treasury bonds with a three-month, six-month, nine-month, or one-year
00:03:46.200 | maturity, they're technically called treasury bills, you're going to get a guaranteed annualized
00:03:52.040 | 5% or higher return now.
00:03:55.880 | And if you multiply the current S&P 500 level, when I wrote it, it was around 41-something
00:04:02.360 | by 5%.
00:04:03.360 | You're going to add 200 points.
00:04:05.600 | And so you're talking about 4,300-plus when I wrote it, which is above where I think the
00:04:10.920 | S&P 500 is going to go for the year.
00:04:13.320 | And even at 4,000, you times that by 5%, you get 200, so 4,200.
00:04:19.040 | I think that's kind of the top for this year.
00:04:21.180 | Who knows the future?
00:04:22.560 | But I'm happy to take a risk-free 5% return without having to pay state and local income
00:04:29.640 | taxes on that income.
00:04:32.880 | Let me go through nine reasons quickly on why I don't think I'm going to regret buying
00:04:36.920 | treasury bonds, because it does feel like deja vu a little bit.
00:04:41.840 | Back in 2008, I bought five-year CDs at like 4% to 4.25%.
00:04:47.600 | I thought it was relatively good as the markets were collapsing.
00:04:51.000 | It felt good.
00:04:52.600 | But in retrospect, it would have been better to have invested any of that money I put in
00:04:56.120 | CDs into the S&P 500, because the bull market resumed starting in mid-2009.
00:05:03.440 | But that's hindsight.
00:05:05.440 | What about forward?
00:05:06.860 | Same thing could happen?
00:05:07.860 | Yes.
00:05:08.860 | The same thing could happen, but the duration of the treasury bonds I'm buying, three months
00:05:13.800 | to 12 years, is not going to set me up for missing out on years and years of potential
00:05:19.280 | upside.
00:05:20.280 | So, first reason why I won't regret buying treasury bonds.
00:05:23.400 | And you might be thinking the same thing, too.
00:05:26.600 | I'm not sure you're deciding between stocks and bonds right now.
00:05:30.200 | I've been buying a lot of treasury bonds, so much so that it made me wonder whether
00:05:35.640 | I will regret buying treasury bonds in the future, and it's made me record this episode
00:05:40.600 | for you.
00:05:41.600 | So, first reason why I don't think I'm going to regret, a 5% return is higher than our
00:05:45.960 | safe withdrawal rate.
00:05:47.460 | Our safe withdrawal rate is currently zero, and it's zero because we have online income.
00:05:54.160 | And if you have a day job, your safe withdrawal rate is also zero because you have day job
00:05:57.960 | income and hopefully you're spending less than you make.
00:06:01.720 | Now, even if we had no online income, as true retirees, not fake retirees, our safe withdrawal
00:06:09.080 | rate would be between 2% to 3%, and that's lower than the gross 5% yield we would get
00:06:15.800 | from treasury bonds.
00:06:16.800 | So, it's like living for free for one more year, and everybody loves to live for free.
00:06:22.120 | Two, there's no upcoming big ticket item we want to buy.
00:06:27.320 | Our car is fine.
00:06:28.720 | It's only got 40,000 miles.
00:06:30.460 | We'll drive for two, three more years, no problem, since we only drive about 6,000 miles
00:06:35.940 | a year.
00:06:37.140 | We just bought a decent house in 2020.
00:06:39.760 | Yes, I always am looking at nicer and nicer homes, but realistically, I don't know, buying
00:06:45.600 | another house and having to move and paying all that much more money, it doesn't seem
00:06:51.160 | realistic over the next two, three, four years, maybe 10 years.
00:06:56.300 | If you don't have any large upcoming expenses and all your existing expenses can be covered
00:07:01.280 | by cash flow, well, you're probably good for locking up your treasury bond money for up
00:07:07.360 | to a year as well.
00:07:09.160 | Third reason why we won't regret buying treasury bonds, we're happy with what we have.
00:07:13.960 | We don't desire fancy clothes, jewelry, or watches.
00:07:18.200 | Our burn rate is pretty low.
00:07:20.120 | We're not taking luxury international vacations, flying private, partly because it seems kind
00:07:26.340 | of excessive with a three-year-old and a five and a half-year-old who's probably not going
00:07:30.880 | to remember much of their travels.
00:07:33.180 | We don't have reckless addictions like gambling, drugs, or alcohol that could really burn our
00:07:37.840 | money away.
00:07:39.320 | Four, treasury bonds provide free living for most mortgage holders.
00:07:44.600 | 80 plus percent of current mortgage holders have an interest rate below 5%.
00:07:51.120 | Probably it's like 90 plus percent.
00:07:52.760 | A 5% return pays for our 2.125% primary mortgage rate and then some.
00:07:59.920 | So psychologically, it feels amazing to live for free every time we buy another slug of
00:08:06.440 | treasury bonds.
00:08:07.440 | And yes, I have to technically buy as much in treasury bonds equal to the size of my
00:08:13.720 | existing mortgage to truly live for free, but actually not really since 5% plus treasury
00:08:21.040 | bond yield is more than twice our existing primary mortgage rate.
00:08:24.840 | So maybe we only have to buy like 60% because of taxes, right?
00:08:29.240 | So 60% of the amount of our existing mortgage.
00:08:32.800 | Regardless, the point is the more you buy treasury bonds psychologically, the better
00:08:37.960 | you feel you're heading in the right direction.
00:08:42.160 | Every single slug, $1,000 slug you buy, it's like, oh, $1,000 of your mortgage is getting
00:08:49.160 | covered and then some.
00:08:50.680 | Eventually, we're going to pay off the mortgage.
00:08:53.160 | And when that time comes, we will hopefully look back and marvel at how cheap home ownership
00:08:58.480 | really was, right?
00:09:00.140 | Because this investment covers our mortgage and then some.
00:09:03.440 | And then every single month, we're paying down principal as well.
00:09:06.140 | So it's kind of like double winning.
00:09:08.140 | And when it comes to money and achieving financial independence, a lot of it is psychological.
00:09:14.020 | You want to feel good and you want to always be making progress.
00:09:17.780 | Five, I'm in decumulation mode, partly because I'm going to be 46 years old this year.
00:09:25.740 | Any return above 0% adds to our net worth because we have our investments and then we
00:09:30.580 | have our income, passive income and active income.
00:09:34.560 | So if someone is in decumulation mode, adding more is contrary to the goal of decumulating
00:09:40.900 | and spending more money and giving more money away.
00:09:44.300 | In the past, keeping your cash earning less than 1%, at a point it was like 0.1%, 0.2%,
00:09:51.540 | that felt terrible.
00:09:52.540 | However, making 5% plus on your cash feels incredible.
00:09:57.100 | And this is where the commenters came in and highlighted the various money market rates
00:10:02.740 | they were receiving from, let's say Vanguard or Fidelity or whatnot.
00:10:07.460 | And this is something I didn't really think about.
00:10:09.820 | And I think the commenter is perfect for bringing this up because I took a look on my brokerage
00:10:14.660 | account Fidelity and they are offering 4.11% to all idle cash.
00:10:20.820 | And you don't have to reinvest.
00:10:22.420 | It's just idle.
00:10:23.620 | Fidelity will automatically invest that money in their money market account that pays 4.11%.
00:10:29.080 | And this is as of February 23rd, 2023.
00:10:33.400 | And a couple of commenters said Vanguard has this money market fund that pays 4.4% or 4.5%.
00:10:42.220 | So even better.
00:10:44.160 | Now you have to check with your brokerage whether that idle cash automatically gets
00:10:48.780 | swept in or reinvested in those money market accounts yielding those figures or if you
00:10:54.580 | have to click some buttons to get that.
00:10:57.500 | So with this in mind, you've got to calculate the difference between the yield you'll get
00:11:02.020 | from buying treasury bonds and the yield you'll get by keeping your money in cash.
00:11:07.820 | Now let's say it's about 0.5% to 0.9%.
00:11:13.100 | Is that significant?
00:11:14.340 | To me that's still significant because all you have to do is click some buttons to get
00:11:19.700 | that higher yield.
00:11:21.220 | This is what online brokerage accounts and banks are doing.
00:11:24.540 | They've got to pay that interest rate to deposited money.
00:11:28.780 | Right?
00:11:29.780 | And then they reinvest that money in a hopefully higher yielding investment to profit.
00:11:35.540 | This is called the net interest margin for online brokerage accounts and banks.
00:11:39.780 | This is classic banking 101.
00:11:42.420 | And 0.5% to 0.9% risk-free spread is massive.
00:11:49.460 | And this is one of the reasons why you might be seeing banks encouraging, encouraging more
00:11:55.580 | depositors to come to them and trying to lure them in with a 4% rate or a 4.5% rate because
00:12:01.940 | all they do is take your deposits and reinvest it in treasury, risk-free treasury bonds or
00:12:07.580 | bills yielding 0.5% to 0.9% higher rates.
00:12:13.100 | And if you can accumulate billions and billions of dollars in deposits, you can make a lot
00:12:18.460 | of money relatively easily.
00:12:20.980 | So as a financial samurai, I want you to think like a lender, like a bank.
00:12:26.140 | Why not maximize your cash earnings?
00:12:29.740 | The liquidity risk is not really that big of a risk with treasury bonds.
00:12:35.240 | You can buy three months and then in three months, you're just going to get a slug of
00:12:39.140 | liquidity back because the treasury bond matures.
00:12:41.900 | And if you just keep on investing every three months and once a week intervals, you're going
00:12:47.500 | to get money back every single week.
00:12:50.540 | And worst case, if you needed the liquidity right now and you had no more emergency fund,
00:12:56.700 | you lost your job, no access to friends or nothing, you can just sell your treasury bonds
00:13:02.820 | on the secondary market.
00:13:03.820 | You'll take a small discount and you'll be fine.
00:13:07.560 | But once you start investing in treasury bonds and you build that ladder, you're going to
00:13:11.440 | be surprised, I think, at how quickly that time goes and how much liquidity keeps coming
00:13:17.500 | back to you.
00:13:18.600 | Because again, you're investing in short-term treasury bonds here.
00:13:23.040 | All right.
00:13:24.120 | Reason number six why I don't think we're going to regret buying treasury bonds.
00:13:28.600 | We've experienced enough stress and anxiety since 2020 to last, I would say, maybe a decade.
00:13:36.880 | Life wouldn't have been too difficult if we didn't have two young children.
00:13:40.740 | But we had a pandemic baby December 2019 and then we had a toddler that we pulled from
00:13:46.780 | school and we had to protect from an invisible enemy for three years now.
00:13:52.460 | And there's been tremendous mental fatigue buildup.
00:13:54.860 | I could actually see it in my face.
00:13:57.020 | I can see it in my energy.
00:13:58.820 | I'm tired.
00:13:59.820 | I don't know about y'all, but I'm pretty tired.
00:14:02.260 | When risk assets were appreciating value in 2020 and 2021, the pandemic was more tolerable.
00:14:08.060 | Hey, at least we're making money.
00:14:10.540 | But then to lose money in 2022 while the pandemic was still going on, that felt terrible.
00:14:18.700 | At least in the second half of 2022, most of the country started opening up and things
00:14:23.700 | started feeling like things are going back to normal.
00:14:27.220 | When I wrote my 2022 review, it didn't feel that great because there was no net worth
00:14:32.660 | progress.
00:14:33.900 | Maybe it was up 1%.
00:14:35.060 | It was basically insignificant.
00:14:37.940 | And so it didn't feel good working for free.
00:14:41.820 | Now with all the income coming in for 2023, it feels great to be able to lock in a 5%
00:14:48.060 | guaranteed return and hopefully it would help soften the cushion of existing risk assets
00:14:54.380 | in the market if they go down some more in 2023.
00:14:57.660 | We don't know for sure, but psychologically to lock in that 5% guaranteed return on any
00:15:03.580 | new cash flow coming in, ah, feels wonderful.
00:15:07.580 | All right, reason number seven, 5% treasury bond yields won't last forever, folks.
00:15:15.020 | If you think about the time frame of the Fed now, we're talking raising Fed funds rate
00:15:20.740 | until mid-2023, maybe keeping it there for six months to 12 months.
00:15:26.660 | So by mid-2024, the rates will start getting cut.
00:15:31.560 | And if you locked in that 5% for 12 months, starting in the middle of this year, I think
00:15:37.620 | you're going to therefore outperform for maybe six months or longer.
00:15:43.340 | The one year treasury yield at 5% plus is the highest since July 2007.
00:15:49.160 | And hopefully it actually takes up a little bit more for the next several months, right,
00:15:53.860 | until the middle of the year.
00:15:55.940 | And once those rates no longer start taking up or actually start fading, the value of
00:16:01.340 | your existing treasury bonds will go up because it's yielding more than what new treasury
00:16:07.820 | bonds can yield.
00:16:08.860 | And so if you actually were able to be more risk-taking and buy a bond fund at yields
00:16:14.980 | at the top, right, the one year yield at the top, then you'll likely make money on that
00:16:19.340 | bond fund as well.
00:16:20.540 | But that's a little different.
00:16:21.740 | Personally, I'm buying bonds to hold to maturity, to earn that risk-free income and not really
00:16:27.620 | sweat about capital risk.
00:16:29.940 | All right, reason number eight, less burden on what to do with your excess cash.
00:16:35.580 | All of us who are spending less than we make will accumulate excess cash.
00:16:39.700 | And if you accumulate too much excess cash, it'll start burning a hole in your pocket.
00:16:44.180 | It's the same feeling for any of y'all who bought an engagement ring and just put it
00:16:49.340 | in your pocket.
00:16:50.620 | You want to propose to your true love because you just can't take the feeling of that engagement
00:16:58.040 | ring still sitting in your counter or hidden away.
00:17:00.780 | You just want to get it over with, propose, and hear whether he or she will say yes or
00:17:06.340 | not.
00:17:07.340 | All right, the final reason why I don't think we're going to regret buying treasury bonds
00:17:10.940 | with a 5% plus yield is because we might outperform the stock market and the real estate market.
00:17:18.020 | If you think about it, the S&P 500, again, is trading at about 18 times forward earnings.
00:17:24.360 | Earnings are declining.
00:17:25.360 | So if we stay at this current level, the P/E will go up.
00:17:29.860 | We still got a Fed who's determined to hike rates.
00:17:33.820 | And there could be a potential recession, another recession.
00:17:37.040 | You don't know.
00:17:38.040 | So while we wait for things to play out, why not earn 5%?
00:17:42.460 | The real estate market, it's in a downdraft right now, folks.
00:17:48.100 | Mortgage rates are going back up to about 6.8% on the average 30-year fixed rate mortgage.
00:17:54.580 | So that's going to take away demand.
00:17:56.860 | So I still believe mid-2023 is a great time to try to get some deals for 10% or maybe
00:18:03.720 | greater off.
00:18:06.040 | But the real estate market takes time to go in cycles.
00:18:09.940 | It takes time to go up, and it takes time to go down.
00:18:12.640 | So we could easily be waiting another 6 to 12 months for the real estate market to find
00:18:17.320 | its bottom.
00:18:19.580 | So to be able to make 5% risk-free while we wait is just wonderful.
00:18:25.940 | Now if you see some wonderful private or public real estate investment opportunity from a
00:18:32.820 | very motivated seller who is selling at below what you think the market will bottom out
00:18:38.300 | at, I would say go for it.
00:18:41.500 | Go for it.
00:18:42.500 | There are many strategies to try to convince people to sell an asset at below what you
00:18:47.620 | think the future market value will be.
00:18:50.980 | And the same thing goes for some stocks.
00:18:53.020 | Stocks tend to discount the future 6 to 12 months in advance.
00:18:56.700 | Nvidia, for example, reported pretty poor results.
00:19:00.620 | And the P multiple, the EBITDA multiple is like at 80 plus times.
00:19:06.260 | It's really expensive.
00:19:07.740 | But the market is discounting the future, and the stock is up 6 to 7% as we speak right
00:19:14.020 | now.
00:19:15.020 | The final topic worth addressing is whether to take more risk if you've already achieved
00:19:20.940 | your target net worth figure.
00:19:23.660 | So several commenters have said, "I don't believe in treasury bonds.
00:19:27.700 | I'm happy to invest 90% to 100% of my net worth in stocks for the long term."
00:19:33.740 | And they say, "Well, Sam, you've already reached financial independence.
00:19:37.180 | You're good with what you have.
00:19:39.060 | Why not take more risk?"
00:19:40.520 | They don't see me investing more in stocks as a risk at all since I already have enough.
00:19:46.960 | And my response is, after decades of living with myself and understanding my emotions
00:19:53.360 | and my objectives, I simply don't feel like I need to take more risk investing in stocks
00:20:00.320 | at this moment.
00:20:01.820 | I already have about 30% of my net worth in stocks.
00:20:05.340 | It's a large absolute dollar figure.
00:20:08.060 | I've already got about 50% of my net worth in real estate, which is also a large, larger
00:20:14.560 | absolute dollar figure.
00:20:16.080 | So if risk assets rebound, then great.
00:20:19.900 | The majority of my net worth will also benefit.
00:20:22.800 | But if risk assets continue to falter or go down, then at least I'll feel better knowing
00:20:28.620 | that the new capital that I've reinvested in treasury bonds will hold its value plus
00:20:33.840 | 5% over the next 12 months.
00:20:37.080 | Everybody has different financial objectives and different asset allocations to match their
00:20:43.220 | risk tolerance.
00:20:44.520 | And for me, this is what I'm comfortable doing.
00:20:47.680 | And what I've also noticed after writing investment-related posts since 2009 is that the more opinionated
00:20:54.920 | you are about how someone else invests is actually a reflection of your current anxiety
00:21:03.160 | about how you are investing your money.
00:21:06.600 | You're trying to justify your decision and you feel uncomfortable that someone else is
00:21:12.360 | investing in a different way.
00:21:14.760 | But you've got to understand that everybody is different.
00:21:18.260 | Different objectives, different levels of net worth.
00:21:21.800 | This is something that's also interesting.
00:21:24.040 | I hear people say, "Well, of course I'm going to invest 100% of my net worth in stocks."
00:21:30.040 | They go up 8% to 10% every single year in the long run.
00:21:34.000 | And sure, you're going to lose some money here and there, but over the long run, you're
00:21:38.800 | going to do fine.
00:21:40.240 | And I agree, over the long run, we'll probably do fine.
00:21:43.440 | We haven't lost money in the stock market in any 10-plus year stretch.
00:21:48.040 | However, in the long run, we're also dead.
00:21:51.360 | I'm 46.
00:21:52.840 | Maybe I have 10 to 40 years left to live.
00:21:56.960 | You don't really know.
00:21:58.040 | So as you get closer to older age or the median life expectancy, you start thinking things
00:22:04.680 | differently.
00:22:05.680 | You start thinking about how to spend and give away your money and plan your estate.
00:22:10.200 | The other thing to realize is your risk tolerance is different based on the amount of money
00:22:16.560 | you're putting at risk, amount of capital you have.
00:22:20.000 | So if you have, let's say, 50 grand to invest, yeah, investing 100% in stocks, the S&P 500,
00:22:28.080 | might not feel that risky.
00:22:29.760 | But if you have $5 million to invest, maybe investing all $5 million in the S&P 500 is
00:22:38.680 | a little bit more difficult.
00:22:40.720 | And from my experience, I think once you cross about the $1 million threshold, you start
00:22:45.920 | wanting to diversify a little.
00:22:47.880 | $3 million is a little bit different.
00:22:50.480 | $5 million.
00:22:52.000 | And then after about $10 million, I mean, $10 million is a lot of money, folks.
00:22:56.100 | You can earn $500,000 a year risk-free in treasury bonds.
00:23:00.460 | And so that compared to an average person's expenses, I think that's a great life, 500
00:23:06.820 | grand, without paying state income taxes.
00:23:09.440 | And then if you bring that number out further, let's say to $20 million, this is a good thought
00:23:14.220 | process to have when deciding where to invest your capital.
00:23:17.260 | If you had $20 million investable capital, you could earn $1 million plus risk-free right
00:23:24.420 | now over the next 12 months.
00:23:26.620 | And I would say 99.99% of the population would be happy to earn and live off $1 million gross
00:23:35.380 | income for the next 12 months.
00:23:37.740 | Hopefully this episode has helped you think about risk-free returns, taking risk, and
00:23:42.500 | how you want to invest your capital and cut up your net worth over the next 12 months.
00:23:48.460 | Don't let me judge how you should invest your money.
00:23:52.660 | Just like I don't let anybody make me feel bad about how I invest my money.
00:23:57.180 | We all know ourselves better than anybody else in the world knows us.
00:24:02.460 | All right, everyone.
00:24:03.460 | If you enjoyed this episode, I'd love a positive five-star review.
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