Most of us have probably read YMOYL and they recommended Treasury Bonds as the mode of investment to reach the crossover point.
Many people say they don't like it now because returns are too small and the principal of your 30 year bond may go down as interest rates rise.
My thinking is, I like safety. I'm very conservative so why not buy 30 year treasury bonds every month if my goal is a stream of income that will eventually pay all of my frugal expenses?
Even if principal goes down some, you still have a FIXED 30 year investment stream of money that you can count on...and at the end of 30 years you are guaranteed the face value of your investment.
Does anyone else still see buying 30 year Treasury Bonds every month as a good strategy for people like us who are going for Early Retirement and independence?
Also, do you think our global and national financial system is so precarious that you believe our government could literally default and I would lose all my money invested in Treasury Bonds? Could things get that bad?
Thanks for any advice....
Tyler
What's Wrong with 30 Year Bonds?
The risk with Treasuries is not so much defaulting (although given the political brinkmanship these days that doesn't seem as impossible as it used to). As dragoncar mentioned, a more serious concern is yields in the face of inflation.
Something to investigate are TIPS which are inflation-protected Treasuries. Their yield is typically even lower but is keyed to inflation. However, when you're looking at inflation + 1% or 2% yield, most people would rather pick up some blue chip dividends. Riskier but returns are generally inflation-adjusted as well and usually outpace inflation.
That said, I think Treasuries should be a part of any portfolio. Just like any investment instrument, I don't think they should be the entire portfolio.
Something to investigate are TIPS which are inflation-protected Treasuries. Their yield is typically even lower but is keyed to inflation. However, when you're looking at inflation + 1% or 2% yield, most people would rather pick up some blue chip dividends. Riskier but returns are generally inflation-adjusted as well and usually outpace inflation.
That said, I think Treasuries should be a part of any portfolio. Just like any investment instrument, I don't think they should be the entire portfolio.
I don't see how current bond yields can keep up with inflation. A lot of the variables that cause inflation appear to be longer term. All of this would increase your risk of not being FI, as returns under the inflation rate would eventually cause you to have to earn money.
Other options aren't as risky as they seem. The blue chips with good dividends such as ATT, GE, Exxon, etc. are almost as safe as government issued debt. Especially, when these are the companies/people that really control the government and use it as a safety net.
The problem with TIPS is that they are linked to a faulty inflation calculaton. This calculation will cause your return to go up when inflation goes up, but it won't match real inflation.
It is a very very bad time for people looking for safe small returns when examined with an historical perspective.
Other options aren't as risky as they seem. The blue chips with good dividends such as ATT, GE, Exxon, etc. are almost as safe as government issued debt. Especially, when these are the companies/people that really control the government and use it as a safety net.
The problem with TIPS is that they are linked to a faulty inflation calculaton. This calculation will cause your return to go up when inflation goes up, but it won't match real inflation.
It is a very very bad time for people looking for safe small returns when examined with an historical perspective.
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jennypenny
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George the original one
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I've been buying I Series Bonds (latest rate yields over 3%). Any thoughts on these vs TIPs?
Three reasons I Bonds are better than TIPS:
"deflation protection"; that is, their rate can never go below zero.
I Bonds can also offer a fixed rate, on top of their inflation-adjusted component. (current fixed rate is 0% though)
Interest earned is tax-deferred
Three reasons I Bonds are better than TIPS:
"deflation protection"; that is, their rate can never go below zero.
I Bonds can also offer a fixed rate, on top of their inflation-adjusted component. (current fixed rate is 0% though)
Interest earned is tax-deferred
There was an article written a few years ago (sorry, can't find the link) about the effect of inflation on the 30 year bond.
The idea was that if a debtor defaults on a debt, the creditor isn't made whole, but usually doesn't lose 100% of the loaned money either. For example, if an individual defaults on a mortgage, the creditor seizes the property and sells it. At the end of the process the creditor will have lost a percentage of his money due to the default, but not 100%. If we imagine a creditor having a portfolio of loans, then the loss from defaults would also not be 100%, because not everyone will default.
The effect of inflation on your principal in a 30 year bond is such that if inflation is 3% per year for 30 years, at the end of 30 years you are effectively given back 40% of your initial principal. Meaning you lose 60% of the principal.
The author argued that this loss due to inflation was effectively a form of default because the percentage lost is similar to, or even worse than, the amount lost to default in other lending situations. It's hard for me to see around this argument, particularly if you think that inflation is typically understated.
So, no, I wouldn't buy and hold 30 year treasury bonds. To my mind it isn't that the government "might default", it's that the system is basically a planned default.
The idea was that if a debtor defaults on a debt, the creditor isn't made whole, but usually doesn't lose 100% of the loaned money either. For example, if an individual defaults on a mortgage, the creditor seizes the property and sells it. At the end of the process the creditor will have lost a percentage of his money due to the default, but not 100%. If we imagine a creditor having a portfolio of loans, then the loss from defaults would also not be 100%, because not everyone will default.
The effect of inflation on your principal in a 30 year bond is such that if inflation is 3% per year for 30 years, at the end of 30 years you are effectively given back 40% of your initial principal. Meaning you lose 60% of the principal.
The author argued that this loss due to inflation was effectively a form of default because the percentage lost is similar to, or even worse than, the amount lost to default in other lending situations. It's hard for me to see around this argument, particularly if you think that inflation is typically understated.
So, no, I wouldn't buy and hold 30 year treasury bonds. To my mind it isn't that the government "might default", it's that the system is basically a planned default.
We've just reached a point where short term rates are 0 - so bonds will never pay less than they do now. To lock into a 30 year bond is probably not wise.
When and if they ever start crawling out of the basement, it may make sense to buy into a maturation cycle where 15/30 years from now, you can plan on them maturing and living off them as they do so.
I know many on the forum snicker at dollar cost averaging and diversification in general... but on average, they do dampen volatility and risk.
So I have tended towards the previously recommended semi-stable dividend payers. Of course if the market totally collapses again like 08' - I could easily eat 30% of value of those holdings... which is a lot of years of 3% dividends to make up. Just pointing out... everyone's got a theory, and none of them are geometric proofs.
When and if they ever start crawling out of the basement, it may make sense to buy into a maturation cycle where 15/30 years from now, you can plan on them maturing and living off them as they do so.
I know many on the forum snicker at dollar cost averaging and diversification in general... but on average, they do dampen volatility and risk.
So I have tended towards the previously recommended semi-stable dividend payers. Of course if the market totally collapses again like 08' - I could easily eat 30% of value of those holdings... which is a lot of years of 3% dividends to make up. Just pointing out... everyone's got a theory, and none of them are geometric proofs.
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George the original one
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> everyone's got a theory, and none of them are
> geometric proofs.
This is one of the reasons I recommend understanding paramutual betting. You can handicap the various strategies and combine them to provide the strongest case... permanent portfolio, though I'm not fond of it, provides such a strategy.
> geometric proofs.
This is one of the reasons I recommend understanding paramutual betting. You can handicap the various strategies and combine them to provide the strongest case... permanent portfolio, though I'm not fond of it, provides such a strategy.
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George the original one
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Predicting the future is always fraught with peril for ridicule, but I do it anyway for comic relief...
Yes, I do think they'll go up in the coming years. I don't think they'll rise rapidly, at least not as absolute numbers. Percentage-wise, the initial climb will be steep (0.75% interest rate raised by a quarter point is a 33% rise!). No, I'm not talking about the bond rates, but there is a market coupling effect.
How soon? Still at least six months away in the USA. US employment reports are still lackluster. Housing costs are still in decline. Inflation is still tame at <4% and upward pressure is due to volatile energy.
What will it take to nudge rates upwards? Probably 2-3 months of sharp employment increases or housing starts or 6 months of >5% inflation. I'm not sure what will happen if the European Union restructures, particularly if any such move happens without some warning.
Yes, I do think they'll go up in the coming years. I don't think they'll rise rapidly, at least not as absolute numbers. Percentage-wise, the initial climb will be steep (0.75% interest rate raised by a quarter point is a 33% rise!). No, I'm not talking about the bond rates, but there is a market coupling effect.
How soon? Still at least six months away in the USA. US employment reports are still lackluster. Housing costs are still in decline. Inflation is still tame at <4% and upward pressure is due to volatile energy.
What will it take to nudge rates upwards? Probably 2-3 months of sharp employment increases or housing starts or 6 months of >5% inflation. I'm not sure what will happen if the European Union restructures, particularly if any such move happens without some warning.