Although going through another bear market is a bummer, the positive is we can all generate more passive income! And given we can now generate more passive income we can also get that much closer to financial freedom.
As a reminder, financial freedom means having enough passive income to cover your desired living expenses. When this happens, you can do whatever you want.
For investors, this bear market with its surging interest rates may very well be a gift. The key is to not get too depressed about your declining portfolio's value because you have the appropriate asset allocation. Eventually, portfolio values will recover.
Another important component is to maintain your active income streams to take advantage of depressed asset prices. Unless you have a guaranteed pension, retiring early and depending only on passive income sources may not be the optimal strategy.
However, even if you are a traditional retiree with zero active income, you should still see higher Social Security cost of living adjustments. Further, your income-producing investments may automatically generate more income in a higher interest rate environment.
Making More Passive Income In A Bear Market
Like many investors, my net worth has taken a hit with the decline in stocks. At one point, I had 30% of my net worth in stocks. A 25% decline in stocks drags down my net worth by ~7.5%. The most I feel comfortably losing from stocks is 10% of my net worth. After 10%, my mood starts to sour.
But as a fake retiree, my main focus is on generating enough passive income to cover our desired living expenses. Seeing our net worth grow in a bull market is nice for the ego. But the most important thing a retiree cares about is their cash flow, not net worth.
Net worth is more of a subjective vanity metric. It's good to calculate so you can see what type of investment income yield you are generating based on your exposure. It's also good to stay on top of your net worth for estate planning purposes.
But other than these two reasons, cash flow is more important than net worth. Cash flow is real, whereas net worth is subjective. My #1 financial goal is to generate enough investment income to support our desired lifestyle.
Higher Interest Rates Means More Passive Income
When interest rates go up, everything from bond yields to dividend yields also tends to go up. The reason why is because every yield is relative to the risk-free rate of return.
No rational investor would invest in a risk asset if they could get a higher risk-free return. As a result, investors should be able to generate more easily passive income when interest rates are higher.
Corporations issuing bonds need to increase their coupon payments to stay competitive with government bonds. Corporations may also increase dividend payout ratios to increase stock dividend yields as well.
In regard to real estate, cap rates need to go up to make the property more attractive compared to the risk-free rate of return. If rents don't go higher then property prices should adjust downward. This is natural market forces at work.
In general, landlords are a big beneficiary of inflation as real estate prices and rents increase. It’s just that at the moment, the temporary rise in mortgage rates has been too quick.
The Crowding Out Of Private Capital Due To Higher Rates
In the past, I would regularly invest the majority of my cash flow in the S&P 500 and in private real estate funds. These two types of investments generated investment yields of between 1.5% – 10% on average. Further, the income generated is 100% passive.
However, with higher interest rates, government bonds are now crowding out private capital. Instead of mostly investing my cash flow into the S&P 500 and private real estate funds, I've earmarked 60% of my cash toward buying Treasury bonds yielding ~4.9%. Yes, 40 percent is still being invested in risk assets, but that percentage was closer to 80 percent before interest rates skyrocketed.
A guaranteed 4.8% rate of return on 1-year Treasury bonds is attractive for anyone who relies on investment income to stay free. Treasury bond yields are especially attractive compared to receiving a ~1.8% dividend yield from the S&P 500, which is highly volatile.
Real estate can easily yield greater than 4.9%. However, there is also downside risk now that mortgage rates have surged higher. Real estate prices could easily decline by 5% – 15% over the next 12 – 18 months if mortgage rates don’t come down during this time period. As a result, it's better to slow down capital deployment or bid more aggressively.
Finally, some of the capital that might have gone to high growth stocks may now go to higher-yielding bonds or higher-dividend-yielding stocks. In a bear market, a flight to safety often means greater passive income. A bear market also reminds you that cash flow is king!
Nominal Returns Are Still Good
Sure, your higher-yielding investments may still lose in real terms due to even higher inflation. However, making a nominal return is still better than actually losing money. And if you aren't losing money from your investments in a bear market, I'd love to know what you're investing in.
Due to higher interest rates, this year I've been able to boost my overall passive income portfolio by about 10%, or roughly $35,000. The increases are mainly coming from Treasury bonds, private real estate investments, and rental property income.
As a fake retiree, I have cash flow from Financial Samurai and other writing-related activities, which gets reinvested into income-generating investments. I also have excess passive income that gets reinvested since we spend less than our current passive income amount.
Here are some ways I'm boosting passive income in this Fed-induced bear market.
Passive Income Boosts In A Bear Market
- So far I have invested $250,000 in Treasury bonds that will generate an extra $11,250 a year. Before this year, Treasury bond yields were not attractive.
- Sunbelt rental property income is rising from ~$50,000 (excluding distributions) to about $60,000 given higher mortgage rates are pushing more people to rent. Check out Fundrise, my favorite private real estate investing platform.
- Lake Tahoe vacation property net rental income has increased from about $650 a month to $1,500 a month net on average given no more COVID restrictions. We went twice this summer and activity was robust.
- Boosted one property's rental income from $6,700 to $8,000 a month. About $300 of the rent increase was due to the market and $1,000 was due to a remodel that created an extra living room, bedroom, bathroom, laundry room, and closet. Tenants have agreed to a $200 rent increase next year.
- Venture debt investments should generate higher returns given pricing is based on the risk-free rate plus a markup. I estimate an extra $3,000 – $5,000 in annual income from new investments this year.
Below is my estimated passive income streams for 2024. There will likely be a +/- 15% variance mainly due to distribution amounts from various private fund investments.
Maybe A Bear Market Isn't So Bad After All
The income yield of your overall investment portfolio is likely up because of higher interest rates and a decline in your portfolio's value. So long as the bear market doesn't suffer much more than a 35% drawdown, we should be OK.
It's obviously a bummer to see your portfolio's value go down. Retiring at the top of the cycle is terrible timing. But if you have cash flow, you can now buy higher-yielding assets. Therefore, a bear market helps you get to financial independence quicker or may increase your chances of staying retired.
Once a bull market returns, investment yields will likely go down as asset prices rise. In such a scenario, you're still making the same amount or more in passive investment income.
In other words, so long as you have regular cash flow and things don't get too bad, you're always winning! Even if you plan to retire, I recommend finding ways to continuously make supplemental retirement income.
The best supplemental retirement income is doing something you'd do for free because it brings you joy and purpose. Financial Samurai will last for years to come because it's still enjoyable to operate. I will also probably write more books before I die.
Shift To Income-Producing Assets Well Before You Retire
A bear market is a good reminder to start shifting some of your non-income-producing investments to income-producing-investments years before you retire. After all, the only way to capitalize on growth stocks is to sell occasionally.
If you counted on making the switch to more income-producing assets this year, then obviously you're more bummed out. Therefore, it is probably wise to start making the asset transfer three-to-five years before you retire.
A bear market is also a good reminder to always have some active income sources so you can take advantage of depressed prices. Don't just retire and do nothing. Retire and do something purposeful that also generates income. It doesn't feel good to be 100% at the mercy of the market.
Not only do income-producing assets tend to outperform during a bear market, they can sometimes produce even more income during downturns. With a proper net worth asset allocation, you should be able to weather the storm until good times return.
Invest In Real Estate For More Passive Income
If you’re looking to surgically invest in real estate, take a look at Fundrise. Fundrise is a vertically integrated real estate platform that invests predominantly in Sunbelt single-family properties. Private real estate is a good way to diversify and earn income 100% passively.
For more nuanced personal finance content, join 50,000+ others and sign up for the free Financial Samurai newsletter. Financial Samurai is one of the largest independently-owned personal finance sites that started in 2009.
What about CD rates that are going for 4.5% for 12 months currently? Any reason you would choose Treasury Bonds over CDs?
Because I’d rather earn 4.7% on a 12-month Treasury and not have to pay state income taxes.
Love the blog, really appreciate the great content.
Question for you sir! I know you said you consider Fundrise passive income, but don’t I have to cash out to take advantage of it? Unless I’m doing it wrong, it’s not like Fundrise is depositing money back to me as it matures, I have to decide to sell it, because otherwise it rolls the income and equity back into other investments on the platform. But I’m pretty new to it so possibly I’m doing it incorrectly.
Thanks again, keep it up!
People who should love this bear market:
Young investors – This is a chance to earn a higher expected future return on your stocks and bonds. In other words, you finally get to “buy low”.
Anyone else that wants to live on passive income – For at least the last decade, low-risk decent income producing investments didn’t really exist. Now, as Sam pointed out, you can get north of 4% from a Treasury bond!
For older investors and those that had large stock and bond portfolios prior to this downturn there is temporary pain. However, the benefits Sam describes in this article will also help them in the long term.
The longer this bear market goes on and the higher rates go there’s an argument that we should look forward to even higher expected returns in the future. Of course, higher inflation for a long period of time is a risk, but there are no free lunches, and as Sam says in the article at least a nominal positive return is better than the alternative!
As a military retiree and using an airline job as my side hustle, I enjoy trying to keep up with your Passive Income streams, Sam. Thanks for the push, lol!!
Rather than ladder or pipeline our Lending/Fixed-Income portfolio to produce passive income (only 20% of our portfolio given my wife and I have defined-pensions and social-security) we “buy and hold” lending assets to produce income.
– 70% Mortgage-Backed Securities (MBS): DLP & Sortis Income Funds
– 15% Asset-Backed Securities (ABS): Specialty Finance like Consumer Lending, Legal Finance & Commercial Supply Chain loans via YieldStreet
– 5% Inflation-Protected Securities (IPS): I Bonds & TIPS
– 5% Gov’t Issued Bonds (5%): Munis & G Fund
– 5% Corporate Bonds: Junk & Convertibles
Long-term our goal is to diversify part of the MBS capital into Venture Debt.
We also produce income in Equities, Real Estate, & Alternatives (Options, Commodities, & Venture Cap), but growth is the focus of each of those classes with dividends a secondary affect. Lending, however, has the sole goal of producing income and complimenting our pensions & social security.
We’ve thrived during this correction, in part to your guidance Sam. Thank you!
Good stuff! But you have what many people will never have, a pension for life! And that value of your pension is worth a ton.
So perhaps there’s no need to keep on generating more passive income? Today, I only do so because I have to. There are no automatic inflation adjustments to my passive income investments. So I got to stay on top of it. And to be frank, I’m not very good at it with my physical rental properties because I feel bad raising rents, so I haven’t for years with two properties.
Sam,
Just bought your book and read it in a couple days. Absolutely loved it. I’m 43 and never had a taxable account. Just opened one up and put 20k in 6-12 month treasuries.
My question is my retirement account(appx 400k) is through vanguard. Since these are index funds how do I take advantage of these treasury yields? I think I’m confused because it does not appear the principal gets returned at the duration like fidelity does and I’m sick of it getting hammered. Do these just constantly roll over? How do I essentially get a risk free return through vanguard? I hope that makes sense. Thanks Sam.
Hi Brandon!
Thanks for supporting my book. If you can do me a solid and leave a review on Amazon, I’d appreciate it!
Nice job beginning your taxable investment portfolio journey. On Vanguard, there should be a Fixed Income area where you can buy Treasury bonds. These will be Treasury bonds that trade on the secondary market. You can also go to TreasuryDirect.gov. But it’s easier to purchase through an online brokerage account.
This article, How To Buy Treasury Bonds And Buying Strategies To Consider, will walk you through everything you need to know. Holding individual Treasury bonds to maturity will return 100% of principal plus the coupon payments. Bond FUNDS will go up and down.
Thanks,
Sam
Thanks Sam, just left a review on Amazon. Appreciate the Vanguard advice. I feel like my head is spinning never knowing that treasuries were available there; I thought it was mainly index funds.
Thanks! Yeah, individual bonds versus index funds. I just buy individual bonds and hold them to maturity. It’s a component of my passive income and cash optimization strategy.
How are you calculating your passive income on the S&P?
Is the $1,600 pm dividends?
Or are you taking all gains for the year as income and maintaining the same principal investment each year?
Dividends. The S&P 500 defended in the yield is about 1.8% right now. So a $1 million position would generate $18,000 a year in dividends or thereabouts.
How about you? What is your passive investment income portfolio look like and where are you investing in the spare market to generate more?
My passive income will increase significantly this year. The net worth decline is painful, though. I’m down 18%. I’ll stay the course until the market recovers then probably adjust to be more conservative for the next downturn. I think the 10% decline limit is a good target.
I still don’t like treasury bonds much. I’d rather pick up a good dividend stock.
18% down is tough. But at least it is outperforming the S&P 500!
When your wife finally retires, I think he will naturally be more conservative with your investments.
Do you think at this time it is better to (a) build a higher passive income portfolio or (b) take advantage of lower valuations and invest in growth stocks or crypto? Especially if you are financially free and don’t need the extra passive income to maintain your lifestyle.
Does it make more sense to try to increase net worth and go for a bigger swing, even if you need to forego passive income in the near future?
I’ve been leaning towards the former.
The latter. If your net worth is already high enough, there’s no need to take excess risk. The extra returns don’t do anything for your quality of life so you might as well take it vantage of higher interest rates and earn more passive income. And really all depends on where you are on your financial independence journey.
How old are you and where are you on your journey?
I agree, even if it should be “latter” (vs ladder), unless you mean it to keep climbing up, lol!
Always climbing. And voice dictation!
Shouldn’t it be the former if you are advocating the first one? ;)
I’m in my early 40s and consider myself financially free. I spent the past 15+ years building a rental portfolio with enough cash flow to pay for all my expenses.
I was very focused on building up my passive income stream. But at this point, I am reassessing my approach given the valuation adjustments in the equity and crypto markets.
Since I can rely on my rental portfolio for my livelihood, I feel I can take on more risk in other parts of my investment portfolio.
Makes sense to invest in more risk assets after such a large decline.
I’m investing 40% of my cash in stocks, venture capital, venture debt, and private real estate. The other 60% is going to Treasury bonds at 4.2-4.6% yields.
I just don’t have the hunger to make a lot more money anymore. Also, both my wife and I don’t work so our risk profile is lower. Did you retire as well with kids?
See: How I’d invest $250,000 in this bear market
Just curious, if you had more active income and didn’t rely so much on passive income, what would be your desired % in equities and non-RE alternative investments?
Similar. Maybe 5% higher equities to 35%.
I’ve always been wary of equities since working in equities since 1999 and seeing the Asia financial crisis destroy livelihoods in 1997. Going through the 2000 dot bomb and 2008-2008 meltdown also scarred me.
I believe more in owning real assets that can be enjoyed. Hence I would have always had a bias toward real estate.
Look at GSE bonds. Fidelity has new issues and they are over 6%. That is pretty darn attractive for what is a very safe investment.
Interesting. I’ll dig more into it.
A government-sponsored enterprise (GSE) is a quasi-governmental entity established to enhance the flow of credit to specific sectors of the American economy. Created by acts of Congress, these agencies–although they are privately-held–provide public financial services. GSEs help to facilitate borrowing for a variety of individuals, including students, farmers, and homeowners.
GSE bonds may have prepayment risk for new issues. You could buy more seasoned pools to address prepayment risk but then the coupons would be low…… I happen to agree with Sam that I believe over the long term interest rates will go down and stay low. As such
I am currently using 3- 5 year brokered CD with call protection as my bond allocation in my IRAs and HSA accounts for the time being (4.6-4.9 paid monthly, quarterly, semiannually). I feel this kind of risk free and labor free return on CD are really attractive as they are currently higher than my hard earned real estate rental return in a sunbelt city. I do not compare fixed income return to that of equities due to asset allocation, not to mention that I feel equities have front loaded their profits for the current decade). I’m less concerned about not getting the optimal CD rates than the dollar risk over the long run. That I don’t currently have any good idea how to address that.
I early retired myself this year and hubby will retire in a few year when our youngest goes to college. Current NW is +30X of projected modest retirement expenses. I am very thankful for Sam and this community because I’ve found good company and learned a lot here and I very welcome anyone’s critique on my strategy so that I can continue to improve. Thanks!
Is anyone aware of publicly accessible Venture debt opportunities say thru a vehicle like Yield Street?
I’m not. But YieldStreet has been offering more product offerings. So I wouldn’t be surprised.
Thanks, Sam. You know anything about Cadre?
So is the $9400 a month ‘real estate crowdfunding’ all from your $810000 in Fundrise? That looks amazing, and I need an investment like this in my portfolio.
I have a couple funds and individual investments. So it’s not all from Fundrise at all. The income and distributions are diversified across multiple types of properties.
I like funds better because I don’t have the time to identify and invest in individual funds as much anymore with two young kids. By investing in a fund, there’s a fund committee that chooses the best deals for me. Sometimes, investors get shut out of individual deals because there is too much demand. By investing in a fund on the platform, it gets first dibs so I don’t have to think about it.
I want as much 100% passive real estate income as possible, which is the main reason why I’m not buying more rental properties.
Thanks! I just re-read your article on Best Passive Investments. As an accredited investor, I’m going to continue with my private Medical Office Building funds (used to own my MOB, so have contacts) and try out Crowdstreet. Bought copies of your book Buy This, Not That for my daughter and her boyfriend graduating in the spring from Notre Dame! No school debt for either and are asking for some financial literacy materials, lots of smart kids coming out of school that will appreciate your knowledge and youth.
Oh wonderful! Thanks! I strongly believe Buy This, Not That will really help them with their personal finances and other great dilemmas in life.
While everything else is down, my rental is still going strong! Husband is continuing to add to a quality pension which will provide another income stream in retirement, in addition to our stock and real estate funds.
Unpopular opinion – I’ve carved a small part of my portfolio for very high yielding dividend stocks – e.g. GLO that have been paying consistently for a few years. I count it as a purely passive income stream.
I still have a couple decades before retirement, but I’m thinking of making a big shift from growth stocks into the S&P overall and bond funds when we get are full swing into a bull market again.
Series I Savings Bonds are 9.6%. Did you invest the $10K max in that?
Yes. Wrote about it end of last year and mentioned it in my weekly newsletter.
We’re blessed!
It really amazes me how consistent your eBook sales are. In a good way.
I’m too lazy to find all of your prior passive income stream table that has been posted, but if I were to guess I’m thinking total sales to date is around ~$1 million. Crazy ROI…
Not that high. But definitely over $500,000 for sure. Yes, the ROI is very high. Sometimes makes me wonder whether publishing the traditional book is the right call. However, it really is priceless to play treasure hunt with my kids once the book came out in stores.
The first goal is just to save. Once you do that – then you can generate passive income.
Hi Sam, I’ve been buying 6-month t-bills from treasurydirect.gov at monthly intervals since April to establish a pipeline. I’m interested in your analysis of a “pipeline” such as what I’m doing versus a “ladder” where you buy a bunch of different maturities of bills, notes, bonds or whatever all at once. (I’ve done CD and corporate bond ladders through a broker.) I’m holding everything to maturity. I’m thinking of combining the two concepts and buying “mini ladders” for lesser amounts at regular intervals, but I haven’t thought through all details.
I think a pipeline is good. It depends on your existing cash. 2-year at 4.6% looks great too.
Not sure this is the best place for this question but does anyone know if fundrise fund distributions are taxed as ordinary income or if they get preferential real estate treatment through depreciation, etc. It would appear they are treated as 1099 investments which would be ordinary income. That would seem to lose a lot of the main benefit of real estate investing which is the tax shelter from depreciation.
Ordinary income.
Yes, ordinary income which is taxable if held as a regular investment and is non-taxable if held in a tax-free (Roth) or tax-deferred (Traditional IRA) account. You only get preferential real estate treatment for direct ownership of real estate rental properties which is a good path for building wealth. Of course there are several paths to building wealth and I appreciate how well these options and pathways are presented by Sam, a true Financial Samurai!
What would you recommend as the best crowd source site that lets you invest directly in real estate projects as a K1 (rather than 1099) investor? Crowd Street?
CrowStreet vets their sponsors well. You will end up investing directly with the sponsor. But they also have funds now.
In order to rebalance to passive income producing investments like bonds, I would need to sell stocks and lock in losses. What should one do in this situation?
Generate new income and send it to bonds.
I think inflation will remain high going forward (5%+). It’s true that, since the beginning of 2022, the Fed is pushing prices of all assets downward via a decrease in PE. But at the same time, governments keep pushing earnings (E) upward through massive fiscal stimulus, which will ensure healthy revenues and earnings for companies benefiting from it – directly or indirectly.
In fact, we might currently be witnessing the nationalitation of central banks. The last step would be that the Fed buy 100% of the bonds in circulation, like they are doing in Japan. At this point, the central bank (ex: BOJ) become useless, hence it’s “nationalisation”. There was an interesting article about this situation written this week by Russell Napier. Some readers might be interested. Here is the article :
https://themarket.ch/interview/russell-napier-the-world-will-experience-a-capex-boom-ld.7606
For that reason, I have not bought any bonds for now. Only a few treasuries to make sure I have some liquidity. We also know that the biggest sellers in this market (central banks) are selling for the foreseeable future. Therefore, yields should continue to go up and bond prices should continue to go down. So, I prefer to stay away as long as they are selling.
Because of everything above, I remain invested in equities through a diversified portfolio.
At the moment, many companies are earning between 10% and 20% annually. So, I don’t see the current 4.5% treasury yield as attractive. Maybe at 6% or more, I will start thinking about fixed investments.
Energy companies are still giving high return even after an impressive rise this year (ex: Phillips 66 – 11.8%). Utilities should benefit from inflation (ex: Verizon – 14.4%). Both sectors are defensive in nature, so they shouldn’t be hurt too badly in the case of a recession.
Semiconductors also looks very attractive. The recent shortage shows how essential they are nowadays. TSM (8%) and Intel (10%) might end up being very lucrative investments. They also benefit from government subsidies for construction of new plants in the US.
Anyway, that’s just my take of this subject. If inflation comes down in the coming months, I might change my view. But for now, I stay away from bonds !!
Sounds good to me. You got to do what you want. I just love getting a risk for a 4.5% with my cash.
Yes. Agree with you on cash. As long as you keep in treasuries (less than one year), that’s fine.
I just don’t like bonds (2 years or more) in the current environment. We can get lucky with a surprise rate cut during the duration of the bond. But, this seems like a gamble at this point.
Except for a small portion of our net worth, why bother with interest rate risk when we can get a 4.5% on cash equivalents and have the upside potential if the Fed has to raise interest rates even more in case of persistent inflation ? That seems like a no brainer to me ..
Anyway, great article, as always. Love reading your blog !
Inflation moving forward at 5%? for how long? I cannot see that happening for long. Too many forces in play trying to reign it in.
Increase in government spending : fiscal deficits are projected to be more than $1 trillion per year for the next 10 years.
(https://www.cbo.gov/publication/58147)
That’s around 5% of the money supply …
(https://ycharts.com/indicators/us_m2_money_supply#:~:text=US%20M2%20Money%20Supply%20is,4.11%25%20from%20one%20year%20ago.)
The only way to stop inflation would be to pay back US government debt, therefore reducing the money supply, and keep interest rates high at the same time. But that won’t happen. It’s politically untenable. So government will keep spending and inflation will stay high for a longer period.
When the fed changed from assuring liquidity to assuring prosperity, I stopped seeing a world in which inflation could be held at 2%. Demographic trends alone will force more interventions in the longer term. These interventions will be inflationary, as will be the deficit spending deemed necessary to keep social cohesion as classes drift further and further apart due to the bubble cycles hampering wreaking havoc on real economy dynamics. I’m currently at 20 times my yearly expenses but you can bet your butt I’m not stopping working ; )
The table you posted of your income says you own mostly municipal bonds, it the text talks about treasury bonds. Is one of those a typo?
I’ve sold all my municipals and bought treasuries now that the treasury yield is so high. Wondering if you did the same.
Not a typo. I just started building my treasury bond portfolio again with $250,000. Before this year, rates were not very attractive. I hold my individual bonds to maturity to eliminate principal risk and simply earn passive income as a retiree.
How about you? Are you investing in more income producing assets? If so, what?
My HELOC is at 2% until January 2024. Time to draw and ladder up on Treasuries at plus 4%.
The Fed has telegraphed it’s near term future rate hikes. The market is predicting 150 basis points of Fed rate hikes over the next 60 days. Why would you lock in 4.5% treasury rates now?
Curious, do you think Treasury bond yields are going to 6%? If so, which duration?
How are you investing to generate more passive income?
No. They will go to around 5.25%.
FHLB and FFCB Agency bonds.
Got it. Treasury bonds could continue to increase for sure. Which is why I am laddering in at three months, six months, and one year treasury bills.
3 months at 4.15%+ now is a no-brainer for spare cash.
In three months, just reinvest at a higher rate. Better than sitting in your bank account earning much less. How are you investing your cash?
I was hoping someone would discuss this. I have some extra cash now for treasury bill/bond purchases after I Bonds but keep thinking if I wait, the interest rate will be higher. So far it’s been true. And each time I weed through the Fidelity offerings I learn more about the buying process, including settlement/announcement dates, etc. (thanks to this blog!)
In the end I’m still on the “sidelines” until I actually make a purchase. But I can’t see why one wouldn’t wait until the November rate hikes. 4-4.5% for 3-9 months is beyond okay with me — but why wouldn’t that be 4.3-4.8% next month?
Do you have to calculate The opportunity cost of not earning the yield as you wait. There is no guarantee the yield will continue to go higher, even though it has consistently this year.
Yields could easily collapse as well, and very quickly I might add. Just look at history. Hence, most people ladder in.
Thanks, Sam.
How do you accurately predict (or maintain) the Fundrise Sunbelt income? From what I can tell, Fundrise offers multiple funds (growth/equity based to income/debt based), and the dividend rate from every one of the funds (even income funds) varies quarter-to-quarter. Are you invested fully in just one fund? And would it not reduce in 2023 if the market dips even a little bit?
I have invested in multiple funds and multiple individual investments. So these are estimates with a +/- 15% variance.
I found the hardest thing to do is discern between the actual profits versus principal returns. Investors will first get the funds back, then we have to wait a quarter to read the quarterly report on what happened.
Here is a case example Where I got a six figure distribution, but I don’t know exactly what the profits are until maybe next month.
That said, it sure does feel good to get any type of distributions back. It always feels like a windfall.
There is opportunity in bear markets. I’m buying dividend growth stocks at a discount which means buying more shares. And more shares mean more dividend income. Thus, increased passive income! I do love it! :)
How much money you locked or equity to generate 380kusd/year? How much it’s yours when you sell it off at retirement/downgradin stage of life? In Eastern Europe, we don’t have the confort of a 3% morgage or high rent income to reach such high levels of pasive streams.
Multiple seven figures. I shoot for yields of between 3% – 10%, with the higher end being real estate crowdfunding and the lower end being various higher-yielding stocks.
My current plan is to live off 100% of my passive income and never touch principal. There’s nothing I want to buy beyond my cash flow at the moment.
Idea for a future post: would be really interesting to see yield rates by investment type either based on public info or your own experience. In other words, if your own ambition is to generate cash flow and not appreciation of the underlying asset, what asset classes and investment vehicles produce the best yields?
Thanks, Sam, for the timely post!
I have a couple of follow ups.
(1) Do you also generate passive income from the blog? I don’t see it in the passive income table above.
(2) You have mentioned a number of times that we should expect to see low interest rates in the long run. How have you changed your perspective on that front given what’s going on currently? (For example, in the past, you have given reasons on “Why Low Interest Rates Are Probably Here Forever”, https://www.financialsamurai.com/why-low-interest-rates-are-probably-here-
forever/)
Hi Jonathan,
Unfortunately, blog income is anything but passive. I have to come up with an idea, write the idea, and have someone edit the article. Then I sometimes respond to comments etc. so I don’t consider blogging and passive at all. See: How much you can make blogging for a living and Being a professional writer is hard.
I still believe the long term trend for interest rates is down and low. We just went through an unprecedented period of quantitative easing due to the pandemic. But I expect interest rates and inflation to come down over the next 12 months. Makes me think that locking in 4.5% treasury bond yields for a longer period is a good idea.
How about you? What are you doing to generate more passive income? What are your beliefs on interest rates?
I’ve been buying a lot of treasuries and legging into IVV on down days here and there. I try not to think about how much I’ve lost in the stock market this year because that makes me too frustrated. So instead I’m doing my best to focus on buying low and taking advantage of higher interest rates. I was sitting on cash for most of the first half of this year and feel good finally putting it to work. This is my first time getting into treasuries in the secondary market and I feel good about it.
Passive income has been flying up as we have been scooping up discounted ETFs and stocks we comfortably assume will be way more in 30 years. My wife and i both feel so lucky with our 3.5% mortgage we have changed our stance on selling to upgrade to a nicer home and will probably keep it now and use as our first rental down the road.
Agreed Sam that as an older person cash flow and monthly income so much more important than the designer net worth. In fact, the line that I paraphrase from you of “spending so much less a month than we take in” almost makes me feel like our investments are creating more investments! I also think as most of your readers allude to, losing so much in SM this year easier when your dividends pay all your expenses.
Dividend yields are taxed at the same rate as capital gains. Aside from being less volatile, what advantage is there in dividend stocks vs. growth stocks?
Risk profile of the underlying company. Dividend stocks generally are well established companies with high free cash flow that generally distribute around 60% of FCF as a dividend. Many growth stocks have negative free cash flow. It’s a P&G vs Rivian investment debate. Over the very long term, growth should do better than income stocks (at least collectively), but when you are about to be or are in retirement, stability of value is also very important. Companies that pay dividends generally have very high confidence on their ability to cover that dividend with FCF.
I get that, but even in retirement, you’re looking at total yield for your passive income. Sam made the argument against growth stocks: “…the only way to capitalize on growth stocks is to sell occasionally.” I’m saying, what’s wrong with that if the valuation/yield outpaces bonds? They’re taxed the same.
And I while I would never put all my eggs in a growth stock (especially Rivian), I think the case could be made for a Growth Stock mutual fund, as it contains a variety of stocks at different levels of their growth cycle, resulting in a more steady increase in valuation.
Hence one of my largest holdings being Vanguard’s Growth ETF (VUG). It makes sense if you have several years even before reallocating to a balanced fund.
Growth stocks are not steady in valuation. If you had to sell this year, you’d be selling at a big discount. Meanwhile dividend stocks you don’t have to sell anything for nice cash flow. Personally, I think a mix is good as you are entering retirement. If you can have enough cash generating assets (real estate, dividend stocks, etc) to continue to let your growth stocks grow in perpetuity, even better – which is my plan.
In retirement, would you say hold a 90/10 mix of stocks/bonds and only liquidate the bonds to float you during the bear markets?