Hello, everybody. It's Sam from Financial Samurai and greetings from Sonoma, wine country, California. Our kids are out from school this week, so we decided to come up and it's actually snowing. That's pretty cool because I don't think my kids have seen snow yet. We're too afraid to drive up to Lake Tahoe, which is about three hours and 20 minutes on a very good day and maybe up to eight, nine hours on a bad day.

That's a no-go with a three-year-old and a five-and-a-half-year-old. Sonoma and Napa Valley are only about an hour and a half away from San Francisco, so that's really smooth sailing. So in this episode, I want to talk about buying treasury bonds yielding over 5% because I published a post that was widely read by tens of thousands of people and I came back with some really good feedback from all of you on maybe why we shouldn't buy treasury bonds yielding 5% or why it's not that big of a deal that I didn't really think about and I got some good data points from various people.

Then I have some more feedback from people who say, "Well, forget about treasuries because I'm willing to invest all of my capital in stocks or 95% plus, even as a retiree." I thought this was quite interesting feedback because that's definitely not my way. As I've gotten older and wealthier with more responsibility to children, I've decided to go more and more into capital preservation mode.

For me, 5%, even with inflation at 6.2% or whatever it is right now, is pretty good because anything above 0% is a positive. Sure, I'm not making a real return, but that's better than losing 19% in the S&P 500 in 2022 and not making a real return because you are doing a double loss of losing to inflation and losing real money in your stock investments.

Now in 2023, it's rare to see consecutive down years in the S&P 500, but I do think 4,200 on the S&P 500 feels like the top, with the S&P 500 at around 4,000-ish. The forward P/E multiple is about 18 times, which is slightly above the long-term medium of about 16 times, but that's down from 20 plus times during the bubble year of 2021.

We've made progress, but it still seems quite difficult to break out to another bull market with the Fed continuing to raise Fed funds rate. The terminal rate is probably going to go to 5.25% to 5.5% because the January CPI and PPI numbers were not as good as expected, so they were higher than expected.

Retail sales was also really strong. Job numbers were also really high. So it seems like the Fed is going to raise interest rates for longer, and maybe they'll stop in May of 2023, and then they might keep the Fed funds rate at 5.25% to 5.5% for another six to 12 months.

So that's longer than expected. That's longer than the S&P 500 rally we've had since October of last year was expecting. Therefore, there should be some downward adjustments to the S&P 500, which we've seen after it topped out at around 4,195, and then it recently has retrenched back to 3,986.

But if you invest in treasury bonds with a three-month, six-month, nine-month, or one-year maturity, they're technically called treasury bills, you're going to get a guaranteed annualized 5% or higher return now. And if you multiply the current S&P 500 level, when I wrote it, it was around 41-something by 5%.

You're going to add 200 points. And so you're talking about 4,300-plus when I wrote it, which is above where I think the S&P 500 is going to go for the year. And even at 4,000, you times that by 5%, you get 200, so 4,200. I think that's kind of the top for this year.

Who knows the future? But I'm happy to take a risk-free 5% return without having to pay state and local income taxes on that income. Let me go through nine reasons quickly on why I don't think I'm going to regret buying treasury bonds, because it does feel like deja vu a little bit.

Back in 2008, I bought five-year CDs at like 4% to 4.25%. I thought it was relatively good as the markets were collapsing. It felt good. But in retrospect, it would have been better to have invested any of that money I put in CDs into the S&P 500, because the bull market resumed starting in mid-2009.

But that's hindsight. What about forward? Same thing could happen? Yes. The same thing could happen, but the duration of the treasury bonds I'm buying, three months to 12 years, is not going to set me up for missing out on years and years of potential upside. So, first reason why I won't regret buying treasury bonds.

And you might be thinking the same thing, too. I'm not sure you're deciding between stocks and bonds right now. I've been buying a lot of treasury bonds, so much so that it made me wonder whether I will regret buying treasury bonds in the future, and it's made me record this episode for you.

So, first reason why I don't think I'm going to regret, a 5% return is higher than our safe withdrawal rate. Our safe withdrawal rate is currently zero, and it's zero because we have online income. And if you have a day job, your safe withdrawal rate is also zero because you have day job income and hopefully you're spending less than you make.

Now, even if we had no online income, as true retirees, not fake retirees, our safe withdrawal rate would be between 2% to 3%, and that's lower than the gross 5% yield we would get from treasury bonds. So, it's like living for free for one more year, and everybody loves to live for free.

Two, there's no upcoming big ticket item we want to buy. Our car is fine. It's only got 40,000 miles. We'll drive for two, three more years, no problem, since we only drive about 6,000 miles a year. We just bought a decent house in 2020. Yes, I always am looking at nicer and nicer homes, but realistically, I don't know, buying another house and having to move and paying all that much more money, it doesn't seem realistic over the next two, three, four years, maybe 10 years.

If you don't have any large upcoming expenses and all your existing expenses can be covered by cash flow, well, you're probably good for locking up your treasury bond money for up to a year as well. Third reason why we won't regret buying treasury bonds, we're happy with what we have.

We don't desire fancy clothes, jewelry, or watches. Our burn rate is pretty low. We're not taking luxury international vacations, flying private, partly because it seems kind of excessive with a three-year-old and a five and a half-year-old who's probably not going to remember much of their travels. We don't have reckless addictions like gambling, drugs, or alcohol that could really burn our money away.

Four, treasury bonds provide free living for most mortgage holders. 80 plus percent of current mortgage holders have an interest rate below 5%. Probably it's like 90 plus percent. A 5% return pays for our 2.125% primary mortgage rate and then some. So psychologically, it feels amazing to live for free every time we buy another slug of treasury bonds.

And yes, I have to technically buy as much in treasury bonds equal to the size of my existing mortgage to truly live for free, but actually not really since 5% plus treasury bond yield is more than twice our existing primary mortgage rate. So maybe we only have to buy like 60% because of taxes, right?

So 60% of the amount of our existing mortgage. Regardless, the point is the more you buy treasury bonds psychologically, the better you feel you're heading in the right direction. Every single slug, $1,000 slug you buy, it's like, oh, $1,000 of your mortgage is getting covered and then some. Eventually, we're going to pay off the mortgage.

And when that time comes, we will hopefully look back and marvel at how cheap home ownership really was, right? Because this investment covers our mortgage and then some. And then every single month, we're paying down principal as well. So it's kind of like double winning. And when it comes to money and achieving financial independence, a lot of it is psychological.

You want to feel good and you want to always be making progress. Five, I'm in decumulation mode, partly because I'm going to be 46 years old this year. Any return above 0% adds to our net worth because we have our investments and then we have our income, passive income and active income.

So if someone is in decumulation mode, adding more is contrary to the goal of decumulating and spending more money and giving more money away. In the past, keeping your cash earning less than 1%, at a point it was like 0.1%, 0.2%, that felt terrible. However, making 5% plus on your cash feels incredible.

And this is where the commenters came in and highlighted the various money market rates they were receiving from, let's say Vanguard or Fidelity or whatnot. And this is something I didn't really think about. And I think the commenter is perfect for bringing this up because I took a look on my brokerage account Fidelity and they are offering 4.11% to all idle cash.

And you don't have to reinvest. It's just idle. Fidelity will automatically invest that money in their money market account that pays 4.11%. And this is as of February 23rd, 2023. And a couple of commenters said Vanguard has this money market fund that pays 4.4% or 4.5%. So even better.

Now you have to check with your brokerage whether that idle cash automatically gets swept in or reinvested in those money market accounts yielding those figures or if you have to click some buttons to get that. So with this in mind, you've got to calculate the difference between the yield you'll get from buying treasury bonds and the yield you'll get by keeping your money in cash.

Now let's say it's about 0.5% to 0.9%. Is that significant? To me that's still significant because all you have to do is click some buttons to get that higher yield. This is what online brokerage accounts and banks are doing. They've got to pay that interest rate to deposited money.

Right? And then they reinvest that money in a hopefully higher yielding investment to profit. This is called the net interest margin for online brokerage accounts and banks. This is classic banking 101. And 0.5% to 0.9% risk-free spread is massive. And this is one of the reasons why you might be seeing banks encouraging, encouraging more depositors to come to them and trying to lure them in with a 4% rate or a 4.5% rate because all they do is take your deposits and reinvest it in treasury, risk-free treasury bonds or bills yielding 0.5% to 0.9% higher rates.

And if you can accumulate billions and billions of dollars in deposits, you can make a lot of money relatively easily. So as a financial samurai, I want you to think like a lender, like a bank. Why not maximize your cash earnings? The liquidity risk is not really that big of a risk with treasury bonds.

You can buy three months and then in three months, you're just going to get a slug of liquidity back because the treasury bond matures. And if you just keep on investing every three months and once a week intervals, you're going to get money back every single week. And worst case, if you needed the liquidity right now and you had no more emergency fund, you lost your job, no access to friends or nothing, you can just sell your treasury bonds on the secondary market.

You'll take a small discount and you'll be fine. But once you start investing in treasury bonds and you build that ladder, you're going to be surprised, I think, at how quickly that time goes and how much liquidity keeps coming back to you. Because again, you're investing in short-term treasury bonds here.

All right. Reason number six why I don't think we're going to regret buying treasury bonds. We've experienced enough stress and anxiety since 2020 to last, I would say, maybe a decade. Life wouldn't have been too difficult if we didn't have two young children. But we had a pandemic baby December 2019 and then we had a toddler that we pulled from school and we had to protect from an invisible enemy for three years now.

And there's been tremendous mental fatigue buildup. I could actually see it in my face. I can see it in my energy. I'm tired. I don't know about y'all, but I'm pretty tired. When risk assets were appreciating value in 2020 and 2021, the pandemic was more tolerable. Hey, at least we're making money.

But then to lose money in 2022 while the pandemic was still going on, that felt terrible. At least in the second half of 2022, most of the country started opening up and things started feeling like things are going back to normal. When I wrote my 2022 review, it didn't feel that great because there was no net worth progress.

Maybe it was up 1%. It was basically insignificant. And so it didn't feel good working for free. Now with all the income coming in for 2023, it feels great to be able to lock in a 5% guaranteed return and hopefully it would help soften the cushion of existing risk assets in the market if they go down some more in 2023.

We don't know for sure, but psychologically to lock in that 5% guaranteed return on any new cash flow coming in, ah, feels wonderful. All right, reason number seven, 5% treasury bond yields won't last forever, folks. If you think about the time frame of the Fed now, we're talking raising Fed funds rate until mid-2023, maybe keeping it there for six months to 12 months.

So by mid-2024, the rates will start getting cut. And if you locked in that 5% for 12 months, starting in the middle of this year, I think you're going to therefore outperform for maybe six months or longer. The one year treasury yield at 5% plus is the highest since July 2007.

And hopefully it actually takes up a little bit more for the next several months, right, until the middle of the year. And once those rates no longer start taking up or actually start fading, the value of your existing treasury bonds will go up because it's yielding more than what new treasury bonds can yield.

And so if you actually were able to be more risk-taking and buy a bond fund at yields at the top, right, the one year yield at the top, then you'll likely make money on that bond fund as well. But that's a little different. Personally, I'm buying bonds to hold to maturity, to earn that risk-free income and not really sweat about capital risk.

All right, reason number eight, less burden on what to do with your excess cash. All of us who are spending less than we make will accumulate excess cash. And if you accumulate too much excess cash, it'll start burning a hole in your pocket. It's the same feeling for any of y'all who bought an engagement ring and just put it in your pocket.

You want to propose to your true love because you just can't take the feeling of that engagement ring still sitting in your counter or hidden away. You just want to get it over with, propose, and hear whether he or she will say yes or not. All right, the final reason why I don't think we're going to regret buying treasury bonds with a 5% plus yield is because we might outperform the stock market and the real estate market.

If you think about it, the S&P 500, again, is trading at about 18 times forward earnings. Earnings are declining. So if we stay at this current level, the P/E will go up. We still got a Fed who's determined to hike rates. And there could be a potential recession, another recession.

You don't know. So while we wait for things to play out, why not earn 5%? The real estate market, it's in a downdraft right now, folks. Mortgage rates are going back up to about 6.8% on the average 30-year fixed rate mortgage. So that's going to take away demand. So I still believe mid-2023 is a great time to try to get some deals for 10% or maybe greater off.

But the real estate market takes time to go in cycles. It takes time to go up, and it takes time to go down. So we could easily be waiting another 6 to 12 months for the real estate market to find its bottom. So to be able to make 5% risk-free while we wait is just wonderful.

Now if you see some wonderful private or public real estate investment opportunity from a very motivated seller who is selling at below what you think the market will bottom out at, I would say go for it. Go for it. There are many strategies to try to convince people to sell an asset at below what you think the future market value will be.

And the same thing goes for some stocks. Stocks tend to discount the future 6 to 12 months in advance. Nvidia, for example, reported pretty poor results. And the P multiple, the EBITDA multiple is like at 80 plus times. It's really expensive. But the market is discounting the future, and the stock is up 6 to 7% as we speak right now.

The final topic worth addressing is whether to take more risk if you've already achieved your target net worth figure. So several commenters have said, "I don't believe in treasury bonds. I'm happy to invest 90% to 100% of my net worth in stocks for the long term." And they say, "Well, Sam, you've already reached financial independence.

You're good with what you have. Why not take more risk?" They don't see me investing more in stocks as a risk at all since I already have enough. And my response is, after decades of living with myself and understanding my emotions and my objectives, I simply don't feel like I need to take more risk investing in stocks at this moment.

I already have about 30% of my net worth in stocks. It's a large absolute dollar figure. I've already got about 50% of my net worth in real estate, which is also a large, larger absolute dollar figure. So if risk assets rebound, then great. The majority of my net worth will also benefit.

But if risk assets continue to falter or go down, then at least I'll feel better knowing that the new capital that I've reinvested in treasury bonds will hold its value plus 5% over the next 12 months. Everybody has different financial objectives and different asset allocations to match their risk tolerance.

And for me, this is what I'm comfortable doing. And what I've also noticed after writing investment-related posts since 2009 is that the more opinionated you are about how someone else invests is actually a reflection of your current anxiety about how you are investing your money. You're trying to justify your decision and you feel uncomfortable that someone else is investing in a different way.

But you've got to understand that everybody is different. Different objectives, different levels of net worth. This is something that's also interesting. I hear people say, "Well, of course I'm going to invest 100% of my net worth in stocks." They go up 8% to 10% every single year in the long run.

And sure, you're going to lose some money here and there, but over the long run, you're going to do fine. And I agree, over the long run, we'll probably do fine. We haven't lost money in the stock market in any 10-plus year stretch. However, in the long run, we're also dead.

I'm 46. Maybe I have 10 to 40 years left to live. You don't really know. So as you get closer to older age or the median life expectancy, you start thinking things differently. You start thinking about how to spend and give away your money and plan your estate. The other thing to realize is your risk tolerance is different based on the amount of money you're putting at risk, amount of capital you have.

So if you have, let's say, 50 grand to invest, yeah, investing 100% in stocks, the S&P 500, might not feel that risky. But if you have $5 million to invest, maybe investing all $5 million in the S&P 500 is a little bit more difficult. And from my experience, I think once you cross about the $1 million threshold, you start wanting to diversify a little.

$3 million is a little bit different. $5 million. And then after about $10 million, I mean, $10 million is a lot of money, folks. You can earn $500,000 a year risk-free in treasury bonds. And so that compared to an average person's expenses, I think that's a great life, 500 grand, without paying state income taxes.

And then if you bring that number out further, let's say to $20 million, this is a good thought process to have when deciding where to invest your capital. If you had $20 million investable capital, you could earn $1 million plus risk-free right now over the next 12 months. And I would say 99.99% of the population would be happy to earn and live off $1 million gross income for the next 12 months.

Hopefully this episode has helped you think about risk-free returns, taking risk, and how you want to invest your capital and cut up your net worth over the next 12 months. Don't let me judge how you should invest your money. Just like I don't let anybody make me feel bad about how I invest my money.

We all know ourselves better than anybody else in the world knows us. All right, everyone. If you enjoyed this episode, I'd love a positive five-star review. And if you enjoyed this episode, please share it with others because they'd probably enjoy it as well. Don't forget to sign up for my free weekly newsletter with 55,000 other folks at financialsamurai.com/news.

And if you haven't, pick up a copy of Buy This, Not That, my Wall Street Journal bestseller at financialsamurai.com/buy-this-not-that. Thanks so much, everyone.