Recently, my zero stock Bill Redemption amount was $102,000. This money is part of 35% of my bond taxable brokerage firm. I want to maintain a 60/40 and 70/30 equity/bond distribution at age 48 as my wife’s double business parent.
Given that I like investing is more than just spending, the first thing I have to do is check the latest bond yields, not the latest cars. Bounce out of my bonds is a 20-year fiscal bond, at 5%.
20-year bond yield is 5%
One of the problems with the S&P 500 trading at 23x forward earnings is that the expected returns are lower due to the valuation average reply. Since 1989, the average forward P/E of the S&P 500 has been around 18.5 times.
Therefore, we must believe that valuations will have a permanent upgrade due to AI-driven productivity, or assume that the P/E multiple will eventually drop to the long-term average. I think there is a little bit of both.
According to JP Morgan, if you bought S&P at any time in history with 23x forward returns, in each case your annual rate of return for the next 10 years is between +2% and -2%. Given this background, about 5% of risk-free starts to appear tempting.
How about the 5% guaranteed return sound?
If I were still in my 20s or 30s, I would say guaranteed 5% returns sounds bad. At the time, as a growth stock investor riding the Internet boom, I was chasing over 20% annual returns.
But now, since I made my first stock investment in 1996, tech stocks have flourished, and the ability to lock capital in 20 years feels like a victory.
The older you get, the richer you get, the more attractive the guaranteed rate of return is.
Wonderful fire scene
Imagine you stumbled upon the financial samurai as a new college graduate in 2009. You maximized 401(k), saved at least 20% of the mark, and invested in stocks and real estate. You want to fire!
After 16 years of savings and investing $50,000 a year with a compound return of 14%, your net worth increased from $0 to $3 million. At 39, you are ready to retire before you are 40. Hooray! You only spend $90,000 a year, so you can live your life.
Now imagine that you have $3 million in your taxable brokerage account. After retiring your active income and reducing your active income to $0, you can invest up to $47,025, single for $96,700, and sell it at the price of a married couple and pay a 0% long-term capital gains tax. Then there is the standard deduction, which allows you to earn more tax-free income when you retire.
If you live long enough, you can convert all $3 million of tax-free into a 20-year treasury, producing 5%. This is a guaranteed $150,000 a year, tax-free income. You will be able to increase your annual spending from $90,000 to $110,000 while still maintaining risk-free income.
Retire early, don’t worry about whether you have money or not. This should be a good enough dream scene!
But you may not be 100% risk-free
Even if this situation can ensure financial security, greed (or optimism) usually wins. We still want more, more, Moooooooar! But perhaps more hunger is not pure selfishness. It can also be driven by selfless reasons.
Personally, I no longer just invest in myself. I’m investing in my kids, who don’t understand the power of compounding yet. But within 10 years, they will and hope that they will appreciate the foundations built for them. And if they don’t take the money much seriously, I hope they at least cherish the time we spent together during Dad’s Day Camp.
That said, this is where DIY investment becomes tricky. While the $102,000 redemption can (should) be easily remitted to Treasury bonds to maintain my ~35% bond allocation, part of me wants to swing for the fence. Perhaps investing $50,000 in tech stocks in nosebleed valuations, private AI companies are the fastest growing even Bitcoin.
I mean, it must be a company like Anduril, an AI defense contractor, that raised $2.5 billion freshly with a valuation of $30.5 billion, which will compound more than 5% faster, right? In just three years, I can see Anduril is worth over $100 billion. Too bad, there is no guarantee on venture capital.
Again, I am willing to take risks in a part of my investable capital.
Risk-free financial bonds as your financial cornerstone
Ultimately, a 5% treasury yield doesn’t have to be an all-or-nothing bet. For retirees and near-retirees, it can be used as a bedrock for your portfolio, covering core living expenses and providing peace of mind.
With this foundation, you can still allocate some of your capital to opportunities with high risk, higher rewards without jeopardizing your lifestyle. This is a dumbbell investment strategy in action.
Just remember to not only look at your asset allocation in a single portfolio, but also review your overall net worth. Like me, you may have multiple portfolios spread between taxable and tax expectations accounts Venture Capitalreal estate, and even a replacement for rare books or coin collections.
Security Plus’s upside potential is why today’s Treasury bonds are so compelling. But don’t forget to win glory from time to time. Your future self or your child will thank you.
Reader, what do you think? Will you put your money into 20 years of fiscal bonds and generate 5% of the bonds? If interest rates drop, you can always sell early and lock in some gains. So, in fact, once you have established a solid net worth, what is the situation where the guaranteed 5% return is locked?
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