Investments Archives - Financial Samurai

Household Debt Composition Mix Over Time: Student Loans Way Up

The NY Fed, Federal Reserve, Bureau of Economic Analysis, and Morgan Stanley put out a series of fascinating household debt charts we should all be aware of.

Excessive debt is what makes extremely rich people go broke. Leverage is what crushed the economy once the music stopped playing in 2008. But boy is debt nice when properly used to grow one’s net worth in a bull market.

Everybody should have the goal of being debt-free by the time they are no longer able or willing to work, no matter how low the interest rate. Having enough passive income to cover all your expenses while owing nothing to anybody is financial freedom at its finest.

Let’s take a look at the charts and see if we can uncover some wisdom.

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Build A CD Step Stool, Not A CD Ladder In A Flattening Yield Curve Environment

Posted by Financial Samurai 63 Comments

When you’re young, you spend time accumulating wealth. When you’re old, you should spend time protecting wealth.

Multi-millionaires go broke all the time because they exposed themselves to too much risk and temptation. Think about all those pro athletes who would still be rich if they had just kept all their money in a bank.

Since 2010, money market and CD rates have been particularly horrible. Retirees depending on fixed income were forced to take more risk. And thankfully, such risk has paid off as the S&P 500 and the real estate market across various parts of the country took off. Further, we’ve all been able to refinance our mortgages at rock bottom rates.

The Fed Funds rate is the overnight inter-bank lending rate

But now, rates are finally moving up given the Federal Reserve has raised their Fed Funds rate multiple times since 2015. No longer do you have to lock in a CD for five years to get only a 2% rate. No longer are you only getting 0.1% on your money market account either. Remember those dog days? You can now get a 12-month CD paying 2.5% or a money market account that pays 1.85%.

With a 12-month CD rate paying 2.5%, you’d think that you could get a much higher rate if you decide to lock up your money for longer. Unfortunately, the best rate for a 5-year CD is currently about 3% in 2018, hardly high enough to lose four more years of liquidity.

As a result of a flattening yield curve, financially savvy individuals should optimize their cash and build a CD Step Stool and NOT a CD ladder. The first step is a one-year CD and the second step is a two-year CD at most. With each expiration of the CD, the strategy is to re-invest the proceeds in another 12 – 24 month CD. Only if the yield curve steepens should you consider building a CD ladder where you’re investing in three, four, five, seven, and 10 year CDs.

Let’s look at various financial scenarios where building a CD Step Stool may or may not make sense.

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Understanding The Yield Curve: A Prescient Economic Predictor

Posted by Financial Samurai 76 Comments

The yield curve is a curve on a graph in which the yield of fixed-interest securities is plotted against the length of time they have to run to maturity. A yield curve is almost always upward sloping, a sign that the economy is functioning properly.

To best understand the yield curve, put yourself in the shoes of the lender, the borrower, and the investor. Each entity is rational and looking to do what’s best for their bottom line.

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How High Net Worth Individuals Invest: Their Asset Allocation Breakdown

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In a previous post we learned that the wealthier one gets, the larger the business component in the individual’s net worth composition. Once you hit a net worth of $100 million, the business component reaches roughly 50% of net worth. Although most of us will never reach such levels of wealth, it’s obvious you should start a business if you hope to get really rich one day.

But what about zeroing in on the public investment portion of a high net worth investor’s wealth. A high net worth investor is defined as someone with $3 million or more in investable assets, not including the value of their primary residence. A ultra high net worth investor has $30 million or more of investable assets.

What are some insights we can gather from their asset allocation that may be most relevant to readers here? After all, everyone can invest in stocks and bonds, but not everyone has the capability or the drive to build a business.

The good news is that U.S. Trust, the Private Wealth Management arm of Bank of America put out a 2018 High Net Worth investor survey consisting of 892 high net worth and ultra high net worth adults across the United States we can analyze.

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Financial Samurai Mid-Year 2018 Investment Review And Outlook

Posted by Financial Samurai 67 Comments

After the 10% 1Q correction, I did a lot of reflecting and decided that I had too much risk exposure. As a result, I decided to move from roughly a 70/30 stock/bond weighting down to a 55/45 stock/bond weighting by selling stocks when the market clawed back to even and buying a slug of bonds after the 10-year yield breached 3%.

Overall, my public investment portfolio is up 4.7% vs. +1.5% for the S&P 500. My portfolio was largely helped by positions in Netflix, Amazon, Google, Omega Healthcare, and hurt by a couple individual California municipal bonds bought in 2017. The muni bonds will eventually pay par value, but in the meantime, they are underperforming.

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