As an investor, you need to adopt a Yin Yang Investor Mindset. In other words, always recognize that whenever one asset class is booming, another asset class may be suffering. If you feel like you missed the boat with one investment, just know there's another boat somewhere in the world waiting.
My investment mindset as a retiree since 2012 has always been to protect principal first. Losing principal when you no longer have a day job is a terrible thing. But at the same time, back then I felt we were in the middle of a potentially strong recovery so I had to invest in equities.
The solution: I invested in plain vanilla S&P 500 and Dow Jones structured notes with downside protection. In return, I'd forego some or all of the annual dividend.
Unlike some retirees, I wasn't focused on generating income from my investments because I had enough to live on largely through rental income and a growing online business. In a bull market, you want to invest in principal growth to maximize returns. But now, I've slowed down my additional equity investments and am now focused on bonds because they are finally selling off.
Why Are Interest Rates Rising?
Take a look at this chart of the 10-year yield post Donald's victory. The rate increase looks like an internet stock from 2000! Now in 2024, interest rates have skyrocketed after the Fed raised rates 11 times since 2022 to combat inflation.
Why did the 10-year bond yield jump by over 20 basis points in one day? The reasons are Donald plans to cut taxes, increase infrastructure spending, and throw up 35%-45% tariffs for imported goods, which will increase the federal budget deficit and increase inflation.
Whenever there's higher expected inflation, rates go up to counteract increased monetary demand. Further, investors tend to sell existing lower yielding investments in favor of higher yielding investments until there's market equilibrium.
Who gets hurt when interest rates go up:
* REIT holders
* Potential homebuyers due to higher borrowing costs
* Home sellers during the initial interest rate ramp
* Borrowers with variable rate loans
* Future borrowers
Here's who benefits:
* Cash rich investors looking for income generating assets
* Retirees who depend on income generating assets
* Homeowners over the longer term who see their property values inflate with inflation
* Equity investors if higher inflation expectations is a harbinger for higher earnings
* Lenders – just look at bank stocks
There's always an adjustment period that happens during any large interest rate jump. Investments move quickly, but the repercussions of such moves take time to play out.
California Muni Bond Case Study: Yin Yang Mindset
Take a look at the California Municipal Bond (CMF) below. This is a security I've been eyeing as interest rates were starting to slowly creep higher pre-election. I've been looking at double tax free securities since I've run out of legitimate business expenses to lower my taxable income. I also thought Hillary was going to win, thereby keeping the status quo of higher taxes.
CMF has declined about 5.8% from its recent peak to now $116.83 after interest rates ramped post election. At $116.83, CMF provides a ~2.6% double tax-free yield for California residents. As I stated in a previous post, my trigger point for aggressively buying bonds is when the 10-year yield hits 2%. Now that we busted past 2%, I've started the process of more aggressively building my bond portfolio and have deployed roughly 60% of my planned allocation.
I plan to slowly deploy the remaining allocation the higher the 10-year bond yield goes. If we get to 5.5%, then I'll allocate 100% of my funds and then work to rebuild my cash hoard again.
Everybody needs to come up with their own investment game plan or an investment thesis in order to stay disciplined. Structure an investment outlook that makes sense to you. Or, you can just have a digital wealth advisor manage your money.
Note: Other attractive investment opportunities I'm looking at that have sold off post election include MUB, AGG, and OHI.
Focus On The Positives
You can focus on the negatives of higher interest rates or you can be opportunistic. The opportunist in me sees a scenario where I can finally build a sizable bond portfolio so I can continue enjoying the fruits of early retirement. Focusing on the positives will not only make you happier, it should also make you wealthier as well.
My original plan was to try and work as much as possible to take advantage of a potential three year or longer window of lower taxes. But honestly, it was a little depressing thinking about having to commute in rush hour traffic again. And for what? To attend a meeting to hear an insecure colleague fluff his feathers? That's terrible.
But now that rates have moved higher, I'm coming around to the fact that maybe full-time work is no longer necessary. What a goldilocks scenario where stocks AND yields move higher.
I've been somewhat dreading the expiration of my 3% – 4% yielding CDs starting in 2017. But if I can now earn a relatively low risk 2.5% double taxation free dividend yield, that equates to a ~3.7% – 5.3% pre-tax yield, depending on your type of investment and tax rate. Asset allocation solution achieved.
The key to building passive income has always been to amass enough capital to generate a livable income stream in order to never have to work again. That's hard to do in a super low interest rate environment. Now that interest rates have moved higher, there's no need to save as much to produce the same amount of income.
Instead of $3,625,000 of capital required to generate $50,000 a year from a 10-year bond earlier this year, you only need $2,358,000 today. What a wonderful thing! That's positive thinking my friends.
Invest In Private Growth Companies
As an investor with the Yin Yang mindset, consider diversifying into private growth companies. Companies are staying private for longer, as a result, more gains are accruing to private company investors. Finding the next Google or Apple before going public can be a life-changing investment.
Check out the Innovation Fund, which invests in the following five sectors:
- Artificial Intelligence & Machine Learning
- Modern Data Infrastructure
- Development Operations (DevOps)
- Financial Technology (FinTech)
- Real Estate & Property Technology (PropTech)
Roughly 35% of the Innovation Fund is invested in artificial intelligence, which I'm extremely bullish about. In 20 years, I don't want my kids wondering why I didn't invest in AI or work in AI!
The investment minimum is also only $10. Most venture capital funds have a $250,000+ minimum. You can see what the Innovation Fund is holding before deciding to invest and how much. Traditional venture capital funds require capital commitment first and then hope the general partners will find great investments.
Track Your Network Carefully
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After you link all your accounts, use their Retirement Planning calculator that pulls your real data to give you as pure an estimation of your financial future as possible using Monte Carlo simulation algorithms. Definitely run your numbers to see how you’re doing.
I’ve been using Empower (previously Personal Capital) since 2012 and have seen my net worth skyrocket during this time thanks to better money management.
Readers, do you have the Yin Yang Investor mindset? What are some other Yin Yang investor mindset examples you can think of? Are you looking at the bright side of higher interest rates by taking advantage of the bond market sell-off and looking to become a lender in instruments such as P2P, real estate crowdsourcing, and hard lending? I'm seriously looking at doing all these things more aggressively now.
Yin Yang definition: In Chinese philosophy and religion, two principles, one negative, dark, and feminine (yin) and one positive, bright, and masculine (yang) whose interaction influences the destinies of creatures and things.