Let’s say you’ve currently got a good amount of cash to invest. With the global financial recession building, opportunities are piling up. However, things could get worse in this bear market given we’re only nine months in. How would you invest it?
2022 has so far been a terrible year for both stocks and bonds. Real estate has outperformed stocks by over 20%. But even real estate is starting to fade as mortgage rates surged higher.
How I’d Invest $250,000 Cash Today
After buying I Bonds, I’ve been accumulating a larger-than-normal cash hoard this year. Usually, I’ll have between $50,000 – $100,000 in my main bank account. But so far, I’ve accumulated over $250,000, partially due to a $122,000 private real estate investment windfall earlier this year.
In addition to accumulating cash, I’ve also been dollar-cost averaging in the S&P 500 on the way down. I’ve also been dollar-cost averaging in Sunbelt real estate on the way up. But these purchases are usually only in $1,000 – $5,000 increments.
Now that my cash balance is larger than normal, this is my thought exercise on how to deploy it. If you have less than $250,000, that’s fine too. I share the percentages of where I will allocate my money.
Background Info To Understand Our Investment Process
I’m 45 and my wife is 42. Our kids our 5.5 and 3.
We consider ourselves moderately conservative investors since we haven’t had regular day job income since 2012 for me and 2015 for my wife. We fear having to go back to work, not because of work itself but because we fear losing our freedom with young children. As a result, we are unwilling to take too much investment risk.
Although we don’t have day jobs, we do generate enough passive investment income to cover our living expenses. This is our definition of financial independence.
We also generate online income, which we usually reinvest to generate more passive income. Therefore, our cash pile will continue to build if we don’t spend or invest the money.
For life goals, we both want to remain unemployed at least until our youngest is eligible for kindergarten full-time in 2025. This way, we can spend more time with both children.
After 2025, we might find day jobs or I might focus on becoming a professional writer. I enjoy being an author but it pays poorly.
We’re also looking to upgrade our home in one-to-three years. That said, my wife and children would be happy living in our current home for the next ten years. Buying another home is not a priority.
Our children’s educational expenses are on track after we superfunded two 529 plans. We also have life insurance and estate planning set up. Therefore, there’s no major big ticket items coming up.
Here’s how we’d invest $250,000 cash in today’s bear market. This is what we’re doing with our own cash and not investment advice for you. Please always do your own due diligence before making any investment. Your investment decisions are yours alone.
1) Treasury Bonds (60% Of Cash Holding)
Only about 5% of our net worth is in bonds, individual muni bonds we plan to hold until maturity. Our target annual net worth growth rate is between 5% to 10% a year, depending on economic conditions. As a result, being able to earn up to ~4.8% on a 1-3-year treasury bond is enticing.
At the same time, I’m always on the lookout for a nicer home because I believe living in a great house is the best way to enjoy our wealth. Think about all the time we spend at home nowadays.
There is no joy or utility derived from owning stocks, which is one of the reasons why I prefer investing in real estate over stocks. However, dividend stocks do provide 100% passive income.
Once the 10-year bond yield reached 4%, I decided to purchase the following Treasury bonds totaling $142,872.91.
- $101,736.74,000 worth of 9-month treasury bills yielding 4.2%.
- $10,766.89 worth of 1-year treasury bills yielding 4.3%
- $15,501.33 worth of 3-year treasury bills yielding 4.45%
- $14,867.95 worth of 2-year treasury bills yielding 4.38%
Although locking in a 4.2% to 4.45% return won’t make us rich, it will provide us peace of mind. We also already feel rich, so making more money won’t make us feel richer. Our focus is on optimizing our freedom and time.
Here’s a tutorial on how to buy Treasury bonds, which includes some buying strategies to consider. I will buy more Treasuries if the 10-year reaches 4% again, as you can purchase an unlimited amount, unlike I Bonds.
The one-year Treasury bonds yielding ~4.73% is especially attractive right now. The reason why is because it’s so much higher than the current 10-year Treasury bond yield at ~3.58%. As inflation and interest rates fade over the next 12 months, one-year Treasury bonds and longer durations will look more and more attractive.
The remaining 39.9% of our cash will be invested in risk assets.
2) Stocks (10% Of Cash Holdings)
Roughly 27% of our net worth is in stocks. It was about 30% at the beginning of the year. Thanks bear market!
The range has hovered between 20% – 30% since I left work in 2012. Since I started working in equities in 1999, I’ve done my best to diversify away from stocks and into hard assets.
My career and pay were already leveraged to the stock market. And I saw so many great fortunes made and lost during my time in the industry. When I left work, I continued my preference of investing mostly in real estate.
Unfortunately, we front-loaded our stock purchases in 2022 through our kids’ Roth IRAs, custodial accounts, SEP IRAs, and 529 plans. For over 23 years, we’ve always front-loaded our tax-advantaged accounts at the beginning of the year to get them out of the way.
Most of the time it works out, some of the time it doesn’t. That’s market timing for you. But we do get to front-load our tax-advantaged investments again in 2023, which will prove to be better timing if the S&P 500 stays depressed.
In addition to maxing out our tax-advantaged accounts, we’ve been regular contributors to our taxable online brokerage accounts. After all, in order to retire early, you need a much larger taxable investment portfolio to live off its income.
No Rush To Buy Stocks
If the Fed insists on raising the Fed Funds rate to 5% and ruin the world, then the S&P 500 could easily decline below 3,600. And if earnings start getting cut by 10%, then the S&P 500 could decline to 3,200 based on the median historical P/E multiple.
As a result, I’m only nibbling at these levels. The Fed says it plans to hike through the end of 2022 and reassess. Although, the decline in the Series I Bond rate makes me more bullish.
With investors able to get a guaranteed 4%+ return in Treasuries, it’s hard to see the S&P 500 rebounding strongly until the Fed admits inflation has peaked.
Given the situation, I’m just buying in $1,000 – $5,000 tranches after every 1% – 2% decline through the end of the year. If the S&P 500 goes below 3,600, I will increase my investment size to $3,000 – $5,000 a trade.
If I was in my 20s and 30s, I would allocate 60% of my cash to buying stocks instead. 30% would go to online real estate and the rest to Treasuries and education.
3) Venture Capital / Venture Debt (20% Of Cash Holding)
I enjoy investing in private funds because they are long-term investments with no day-to-day price updates. As a result, these investments cause little stress and are easy to forget about.
I’ve already made capital commitments to a couple venture capital funds from Kleiner Perkins. I also made a capital commitment to Structural Capital, a venture debt fund. As a result, I will just keep contributing to these funds whenever there are capital calls.
I expect venture debt to outperform venture capital (equity) during this time of higher rates. Venture debt is a lower risk way to generate returns in private companies.
The biggest downside to investing in these funds is higher fees. We’re talking 1-3% of assets and 20-30% of profits.
4) Real Estate (10% Of Cash Holding)
Real estate is my favorite asset class to build wealth. It provides shelter, generates income, and is less volatile. Unlike with some stocks, real estate values just don’t decline by massive amounts overnight due to some small earnings miss. Real estate accounts for about 50% of our net worth.
No matter what happens to the value of our current forever home we bought in 2020, I’m thankful it has been able to keep my family safe and loved during the pandemic. When it comes to buying a primary residence, it’s lifestyle first, investment returns a distant second.
All the memories, photos, videos, and milestones our kids have achieved in our current house are priceless. Even when I was suffering from real estate FOMO earlier in the year, our kids said they prefer our much cheaper home. As a real estate obsessed father, that meant a lot.
Their response showed me the price of a home isn’t necessarily the main thing that makes it nicer. The house layout and its familiarity matters a lot too.
Given my wife and kids are happy in our home, I shouldn’t try to buy another one so soon. Ideally, we live in our current home for at least five years (2025), save up a lot more money, and comfortably upgrade based on my net worth home buying rule.
Therefore, I will continue to dollar-cost average into private real estate funds like Fundrise that invest in single-family homes in the Sunbelt. Prices and rents are cooling. However, Sunbelt real estate should be a long-term beneficiary of demographic trends, technology, and work from home.
I will be investing in $1,000 – $3,000 tranches through the end of the year.
5) Debt Pay Down (0% Of Cash Holding)
In a high inflation and rising interest rate environment, I’m not paying down any extra mortgage debt. I already paid down some mortgage debt at the beginning of the year when inflation was high and Treasury bond yields were low.
At the time, it was a suboptimal move since it’s best to keep your negative real interest rate mortgage for as long as possible. High inflation was paying off the mortgage debt for me. But I paid off some mortgage debt anyway because it felt good and I was uncertain about stocks.
In retrospect, paying down some mortgage debt in 2021 was the right move as it saved me from losing ~20% had I invested the cash in the stock market. Hence, if you have debt, consider following my FS DAIR investing and debt pay down framework. This way, you’re always making financial progress.
Today, with inflation still high but Treasury bond yields much higher than mortgage rates, it makes no sense to pay down a negative interest mortgage rate. Instead, it’s better to buy Treasury bonds and live for free, which I’m doing.
If you have revolving credit card debt or auto loan debt, I’d follow my FS DAIR framework and accelerate paying down principal. You want to benefit from rising interest rates not get hurt by it.
Just make sure you don’t compromise your liquidity too much in a bear market. Always have at least six months of living expenses in cash.
6) Education (0.1% of Cash Holding)
Education is the best investment. The paradox of education is it is extremely important to help you achieve financial freedom, yet it is also inexpensive or free today.
For example, for only $20 after tax you can order my bestseller, Buy This, Not That and immediately gain a competitive advantage to building wealth. You’ll also learn how to make more optimal decisions on some of life’s biggest dilemmas.
You could also subscribe to my free weekly newsletter and my free blog posts to stay on top of timely financial topics. The more you immerse yourself in money topics, the more you will learn and take appropriate action to help boost your wealth.
You can also go to YouTube, Khan Academy, or MOOC and watch hundreds of hours of free educational videos. Or you can pay for online courses to get even deeper into a subject.
Ignorance is no longer an excuse given how accessible education is today. Please allocate some of your budget to continuing education. Over time, the combination of experience and education will dramatically improve your confidence, wealth, and peace of mind.
Deployment Speed During Depends On Your Certainty
When the investment return is certain, it’s easier to invest cash. When you’re certain you don’t need the money, it’s easier to invest for longer durations as well. But not all investments are created equal.
I have deployed 60% of my $250,000 in Treasury bonds because I wanted to earn a higher return immediately. In fact, I’m actively trying to figure out a way to optimize our business cash as well. The investment is risk-free, so I have no fear.
I will most certainly fulfill my venture capital and venture debt capital calls when they come due. Otherwise, I will be banned from ever investing with these fund managers again. These investments have risks, but I want to diversify further.
I’m happy to keep investing in Sunbelt real estate funds, like I have since 2016, because I’m confident in the long-term demographic trend of relocating to lower-cost areas of the country. However, I’m also confident real estate prices and rents will fade over the next year, hence why I’m slowly legging in.
Finally, I’m certain I don’t like stock market volatility. I’m also uncertain how far rich central bankers will go to crush the middle class. As a result, I’m just nibbling and will focus on valuations.
It is discomforting to see your cash pile dwindle as you invest during a bear market. However, investing during a bear market tends to work out well over the long run. Further, if you maintain your income streams, your cash pile will replenish every month.
We know the average bear market lasts about 15 months. Hence, there’s a decent chance we could get out of this rut some time in 2023. Taking advantage of higher guaranteed returns while legging into risk assets today sounds like the right thing to do.
Reader Questions And Action Items To Invest Cash
Readers, how would you invest $250,000 cash in today’s bear market? Even if you don’t have $250,000, where would you invest your money? What type of investments do you think will generate over a 4.2% return over the next 12 months?
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Hi Sam, conundrum, my sister and (we are 59 and 56) i have two properties paid off rented one worth 1m the other 500k. My sister wants to sell and cash out how can I keep properties buy her out and still have some passive income? BTW, the book was great.
If you don’t have cash to buy treasury now, does it make sense to sell some of your current stock ( given limited return next year)? Might be hit with a tax bill for capital gain though..
I really dislike selling anything to cause a tax liability. So I’m focused on investing incremental cash.
It’s also hard to know where the S&P 500 will go in 2023. If you look at the estimates, the average is about 4000. So in other words, we’re not going anywhere. But some estimate down 20% from here.
Sam,
I’ve been a religious reader of the blog since my honeymoon in 2013 when I realized that I would be in charge of my family’s finances and had no idea what I was doing and started googling. Post reading/listening to you and a lot of others throughout the years, you all have helped me in my journey to pre-funding what I hope to be a great life with our now complete family of five. And as a Wall Street person myself (fixed income not equities) it’s been immensely gratifying to hear your perspective on the markets especially given how right you have been over the years (2020 bottom anyone?).
As a trader my skill sets are with numbers not letters but given my lack of involvement in the Financial Samurai community (outside of a few comments) I wanted to at least try to provide your readers with a bit of information in the fixed income markets which, since cash is trash for the last decade, has been largely ignored. Given the Fed’s hawkish stance and the market’s willingness to buy every dip given everyone’s personal balance sheet has massively improved since the pandemic, I’ve come up with what I think is an interesting short term investment thesis.
FLOT is the Blackrock floating rate ETF which seems pretty benign in nature at first and looking at the 12mo yield is currently 1.75%. However if you look at the indicated yield going forward with the last declared dividend it’s~5.1% and will only go higher given most FRNs are quarterly resets and the Fed keeps insisting it will keep hiking until it breaks the back of the economy. This protects your cash the best from inflation while you wait for the S&P to reset given most money market accounts have a 3 handle.
My second investment thesis is that the S&P will not bottom until after student loans start to be paid again. A lot of the money in the economy being spent by young people has gone into consumer goods which has propped up earnings because of both all the stimulus being paid to people during the pandemic but also from a lack of having to be paid back to student loans. With the can being kicked until June or the Student Loan forgiveness question is answered I don’t see there being a catalyst for a big equity sell off until then.
SCOTUS has recently announced they will hear the Student Loan forgiveness in February next year and given the current SCOTUS make up as well as frankly a pretty big question on the legality of the program from people on the center left, I would think it gets struck down. With some student loans floating the rate having to be paid will be much greater and will suck a lot of money out of the economy leading to the recession that the Fed hopes for.
Therefore my investment thesis is to currently keep buying FLOT and wait for what I think is an overvalued equities market to fall to a more reasonable target (pre pandemic levels). The other side of the argument is that if SCOTUS allows the program or if they continue to keep kicking the can down the road for Student Loans that equities will soar and you will miss the rally. However it seems like Jerome Powell has taken the lessons from the 70s at heart and will do whatever he needs to take the economy to break the back of inflation and you can keep clipping a 5% coupon with downside protection until he does.
Thank you so much for all the content you’ve put out over the year; I’m sure you constantly hear how much you’ve changed peoples lives with your hard work and research but from my perspective your blog has been an invaluable tool for helping me create the life that I want with my wife and three kids. It’s a lot of work but I hope that you continue to educate all of us; in a sea of negativity and complaining across the internet you are a joy to read with your optimism and logic. The best to your and your family in the holiday season.
Best
i really liked this post Sam! i’ve been sitting on and building cash all year. currently i have about 80k in checking. i recently put 130k in one year treasuries after reading this article when first posted, which are at 4.3%. i also have $360k in VMRXX. it advertises as a yield of 1.25% but over the past few months i have been getting a monthly dividend of over 1k, which is about 3.34% yield according to my math. and of course it is fully liquid.
my fixed income/cash stands at 11% if net worth which is higher than i woukd like but in this uncertain environment i’m ok with it. i may use a portion to grab a property next year if real estate comes down like many predict.
i am already 60% of net worth in stocks and 20% of net worth in business so don’t feel particularly like i need to do more than nibble on equities like you on selloffs. and i have no debt or mortgage on my home so good there. just sitting tight.
my one regret is i sold my primary residence last year in a great area (northern VA inside beltway) and probably should have held onto it. could be getting 3-4k a month on rental income.
Love these updates Sam! 9 months into this thing, would welcome another real estate market update as well, in terms of timing for a potential upgrade.
Sam, just curious if you’re still holding the bag on BABA. I DCF’ed on the way down and learned a valuable lesson of trying to catch a falling knife. Curious on your thoughts of China at the moment.
Sadly, yes. Not a large position, but still down a lot. Hard to seek Chinese equities now at 15-year lows.
Personally, I’ve been buying Alibaba all year as much as I can between $70 and $90. I now have 110 shares at average cost of $150/share. This compare to my position of 50 shares @ $225/share at the end of last year.
That’s the only purchase I’ve made this year. Waiting to see how the market settle next year with interest rates and inflation to start buying again in the US market.
I think China fears are overblown. I’m sure things will sort out in a way or another. I just don’t know how. But when that happen, Alibaba will be a big benificiary. If things turn out badly, I can’t lose that much since Alibaba is now so low.
And it’s not a big position anyway. So, I can’t lose that much. That’s the kind of investments I like to make.. Not a lot of downside risk. But a lot of upside potential if things go back to normal.
Put it all in CLM – 23% Yearly Dividend; DRIP (or not) it’s paid out monthly.
CD rates for 1-3 years are really good right now and increasing. Likely FED will continue to avoid QE thru 2024, we could see high 4% 23 months CDs then.
Yes CD rates are going up! CIT is currently offering a 4% APY 18-month CD. We haven’t seen rates that high in ages.
Yesterday I had a banker offer me 3.7 on a money market account!
T-Bills right now are beating the hell out of most CDs. So are 2-year Notes. If you are interested in CDs, I’d buy direct from the Treasury instead.
If you put your money in what is considered a high-rate CD today paying 3-3.5%, the bank will just take your money and buy Treasuries with it at 4.5% and rake 1-1.5% off the top. CDs are a total ripoff right now.
I had my money in CDs for a long time. No more.
Another reason to buy treasuries instead of CDs — no state income tax.
Check brokered CDs on Vanguard, which have been outperforming most govt options.
Hi Sam –
Im new to treasuries and trying to understand its interest rates. When buying bills less than 1 year maturity, are you actually getting the 3 to 4 % Interest rate for a 4 week or 8 week bill? Or does it equate to only 0.2%~ or so for that 4 week period of investment?
Anthony
You’re getting a 3-4% annualized rate, but you’re only getting the amount of interest for the 4 or 8-week term.
“I enjoy being an author but it pays poorly.”
Boy howdy. I do enjoy it, but with 600k to a million new books being published in the US each year, this makes it very hard to monetize. I’ve written several novels that were very well received, and even sold more than there are people in my hometown. But my wife and I each beat six figures and I knew it would never pay any bills of consequence unless I willing to work like a dog at writing things I didn’t especially enjoy.
It’s enough for me that the few people who can still find them might still enjoy them a century after I am gone.
Sam – I’m just writing to tell you to keep doing the podcast please!! It’s awesome, you are great at it, and it’s incredibly valuable. Thank you for all your hard work.
Thank you! Will do my best! Great reviews on Apple or wherever you listen are always encouraging. Thanks
They don’t allow/provide for reviews on the Google app, but I’ll quickly use Spotify or another platform so I can leave a review.
I have allocated some funds to buy Treasury bills/bonds in the next few weeks but wondering now if waiting for the November Fed hike would be more advantageous? From what I read, it appears they will hike it at least 75-basis points again, which I assume leads to higher yield for short-term bills? I’m not looking into anything more than 2-3 years for treasuries.
Your thoughts are appreciated!
What are your thoughts on high yield BDC stocks like $ARCC?
Just found your podcast and loving it. Thank you. A lot of my cash is tied up in my SEP401k. I actually moved a lot into bonds late last year as I thought markets were about to tank and got pounded by bonds. These bond funds don’t really have a maturity date in vanguard correct? So would you still invest heavily in bonds currently as I don’t have much in a brokerage account. Thanks!
Great post Sam, I am intrigued by the Sunbelt Real estate Trust, I think that will be a great investment in 2023. I see the economic road getting even rockier after the November Elections, and that will just bring valuations of everything down. Not to mention the hurricane in Florida may hurt home values and people’s desire to want to move to Florida in the interim, but that will wane over time.
With the dollar the strongest it’s been in 20+ years, would it make sense to hold some EUR, GBP, and JPY for the next year or so until the dollar drops back down? Could be a 15-20% gain, no?
Yes, slowly going long into EUR and JPY. Confused by Sam advocating for the treasuries at 4.5% – as the fed hikes the bonds fall. Furthermore any international currency intervention will drop bonds. I don’t see bonds being a winner from here out. Proper hedging seems dipping into spy, I-bonds, and an international currency basket.
If you buy actual bonds (not bond funds), you get your principal back at maturity. So 4.5% is a solid coupon and you don’t need to go far out to get that…
Hold until maturity.
I’m 58 and my wife is 51, combined income 400k-550k depending on how good my business is doing (i.e., distributions)
No debt of any kind, including mortgage, kids just finished college (not gainfully employed….yet)
Assets:
1.4m – Company Stock (yields 30% yoy ave), restricted to sale till retirement
3.0m – brokage accounts (80% stock, 10% bonds, 5% RE, 5% cash)
0.8m – home
We spend about $150k a year living comfortably but not lavishly in northern VA, save about 200k a year overall.
I would like to retire in 2 years so continuing to save aggressively and would like to wait out the bear market.
So we have about 20k a month in positive cash flow that I am very happy to put into the market sub 3900, still having a 250k (1-2 year) cash buffer.
Biggest thing is I have no passive income streams, rentals, side hustles, except stock/bond dividends. I guess when I retire if 4.4 mill in brokerage and rates 4.0% I could put it all in treasuries and yields $176,000, which is more than our yearly expenses. Interesting….
Look at GSE bonds. Very low risk and the yields are quite a bit better than treasuries.
well said
These yield are a dream, especially if we do believe inflation will not compound any longer (and because of demographics, it will not)
This is a dream for the rentier, 1m can give you 50k risk free, 2m is 100k, guaranteed for 10Y. Not a bad deal IMHO
I just invested $30,000 in real estate crowdfunding. Not much cash left at the moment with all the upcoming year-end expenses. If the stock market dips below 3,200, I might trade in some bond funds for stock index funds.