Hello everybody, it's Sam from Financial Samurai. And in this episode, I want to talk about whether this is as good as it gets. Things are really good right now. We've got the S&P 500 up about 20% year to date. We get to borrow at a negative real interest rate.

So in other words, when inflation is higher than the interest cost, you saw November CPI come in at 6.8%. If you take out a 3% mortgage, your negative real interest rate is 3.8%. And that's just like getting paid to borrow money while your asset goes up. And then finally, we've got IBON returns guaranteed by the government at 7.14% through April 22, 2022.

And then it just changes based on whatever the index is after that. So 7.14% is a positive real return and it's also guaranteed. So on the one hand, you got guaranteed positive real returns and you can borrow at negative real interest rates. That is a tremendous combination that everybody needs to take advantage of.

You can only buy $10,000 worth of IBONs per person. And if you have a business, you can buy $10,000 as well. So theoretically, if it was you two, a couple, and you both each had businesses, you could buy $40,000 worth of IBONs in December of one year and another $40,000 in January of the next year.

So that adds up pretty quickly, right? That's $80,000 where you can get a 7.14% return. That's like getting $5,600 of guaranteed money. So let me talk a little bit further about what negative real mortgage rates means. That means to me, at least over the next 6 months, probably 12 months, that there's going to be a tremendous tailwind in the real estate market.

If you're getting paid to borrow money, you're going to borrow more money. And if you already have a lot of debt or any debt, the rational thing to do is to hold on to that debt as long as possible instead of paying down extra principal. Now don't get me wrong.

I think paying down debt over time is a good thing. We should all strive to be debt free by the time we are maybe 60, no longer want to work or are unmotivated. However, debt enables you to live a better life than you could have otherwise because it allows you to buy things beyond what your cash can afford.

So I've paid off a mortgage before. I think it was in 2015 on a mortgage I took out in 2003. And I don't regret paying it off at all, even though I could have made more money in the stock market, real estate market and other alternative assets. I never really regret paying down debt.

However, if you want to try to optimize as much of your cash as possible, you should think about the debt interest rate relative to returns and relative to the inflation rate. So unless you have a lot of cash just lying around, I wouldn't pay down extra debt right now.

But if you do have a lot of cash, well, just know that it is also getting pounded by inflation as well. So 6.8% November inflation number. If you had $100,000 in cash, it basically buys about 6.8% less today than what it could have bought a year ago. And given our finances are always fluid and the market is always fluid, I do recommend you follow my FSDAIR framework.

FSDAIR framework that talks about how much to invest and how much to pay down debt if you want to do both. And so for example, if you've got debt interest rate at 2%, I would use 20% of your free cash flow to pay down debt and 80% to invest or hold on.

I don't think negative real interest rates or negative real mortgage rates are going to last much longer than two years. And I say two years because I think in 2022, the inflation rate normalizes from about 6.8% down to about 4%. And then in 2023, it normalizes down to about 3% or 2%.

So as the inflation rate comes down, and maybe mortgage rates go up, maybe because mortgage rates have not really gone up over the past several months, then you'll see a normalizing of the real interest rate. However, based on my forecast, that still means the vast majority of debtors or mortgage borrowers are going to have negative real mortgage rates for the next 24 months.

So in such a scenario, it still provides a positive tailwind for any asset class which requires or is commonly bought with debt. Therefore, I still remain very positive on real estate. Now let's talk about IBON returns. 7.14% through April 2022. And it might go up or it might go down.

But either way, it's probably going to be somewhere similar, right? I don't think this supply chain issue and inflation is going to change that quickly, but it might. So another way to look about a 7.14% IBON return is that your investments need to earn higher than 7.14% or else why bother?

Why even get out of bed? Why even be an active manager or manage your money? Because you can just earn risk-free 7.14%. You need that risk premium. So the way to also think about it is, well, maybe risk assets will definitely return more than 7.14% in 2022 or at least through April 2022, because investors are all in cahoots.

Everything is relative to the risk-free rate. Now the true risk-free rate is more like the 10-year bond yield because you can purchase unlimited amounts of the 10-year bond. However, looking at the IBON return of 7.14% is a fair risk-free rate as well, at least for a portion of your capital.

So all this is to say that we should probably stay long mostly in risk assets in 2022, even though the Fed is tightening and valuations are high. Now let's not be naive and expect no correction of 10%, 20% over the next 12 months. When you see individual stocks get slaughtered, like in the S&P 500 and the Nasdaq, a lot of stocks are down 30%, 40%, 50% while the index is trading off only maybe about 5% from its all-time high.

So just be careful regarding investing in richly valued assets in 2022. Instead of going for triples and home runs, I think we all need to be disciplined to try to preserve the capital we have gained, especially since 2020, and we should try to look for singles, not even doubles, singles.

Singles where if you're at the top of the lineup, you hit the singles so someone can clean you up, or singles to just advance the runner and just keep the line moving and keep the momentum going. One of the worst things that could happen is if you round trip your investments.

So round trip means it goes up and then it goes all the way back down to where you bought it for during this pandemic, because for most people, the pandemic has negatively affected their lives. It certainly has mine. I haven't traveled as much. I haven't seen my family. There's, you know, my kids have to wear masks at school.

It generally is a net huge negative. But the one positive has been that we've been able to make money or investors have been able to make money during the pandemic. So if you go through a negative in life because of the pandemic, and then you end up round tripping your investments and losing those gains, then you're going to be really, really upset.

So please don't let that happen to you. Focus on risk control and focus on appropriate asset allocations going forward. All right. That's it for this episode. If you enjoyed this episode and it has made you think about being a better investor, I'd appreciate a positive review. I read them all and it keeps me motivated.