Philip Brewer, a freelance writer for Wisebread (I presume, amongst others) has had a couple of mentions here, lately; this one for a comment that he made on his review of the book: Your Money Or Your Life [AJC: snappy title]:
The book has a very simple investment program that many people have taken issue with. The authors want you to invest your surplus money (a growing amount, once you make some progress on maximizing income and minimizing expenses) in long-term treasury bonds. More than a few people have criticized the program on the grounds that a diversified stock portfolio would produce higher returns. These people have missed the point: The goal of the investment portfolio is to produce a very secure stream of income. Long-term treasurys are a perfect choice.
Since I haven’t yet read the book, I can only say that I disagree if the authors – hence Philip – were talking about investing for retirement; after retirement – Making Money 301 – I wholeheartedly agree that the “goal of the investment portfolio is to produce a very secure stream of income.”
I also agree that “Long-term treasurys [sic] are a perfect choice”, especially if they are inflation-protected (e.g. TIPS in the USA), and perhaps laddered in some way; alternatively, you could try:
– income producing real-estate purchased in whole or in large part for CASH,
– index funds (although, you open yourself up to a certain volatility),
– Covered calls, perhaps protected by PUTS (if the option pricing allows).
But, not when you are still trying to build up your nest-egg unless you have such a low required annual compound growth rate (which probably means that you came by the page accidentally and are about to click off, never to return) that bonds / treasuries will do the job.
Until you do get within a few years of retirement, the goal of your investment portfolio is simple: it should be to produce your Number 🙂
Well, I might consider buying long dated treasuries either to make money in anticipation of interest rate cuts (which is pretty unlikely today but worth considering if interest rates are higher) and/or a appreciation of the US$ or buying shorter dated treasureis as a safe haven if I thought everything else was going to fall apart. Even then, there are probably better choices with which to make money.
Your last point is one that I am dealing with at the moment – how close to retirement should I start making the transition from making money to securing a secure income stream?
So speaking of TIPS – what is your take on them?
There is a larger than zero – but hopefully reasonably small – chance that we will end up with serious inflation and potential hyperinflation over the next 24 months.
TIPS are supposed to protect us from that, but what I don’t know yet is if they will withstand the strain of some really serious inflation. I don’t understand how the government hedges the inflation risk – is it merely a promise to print more money or is it tied to something of real value?
@ TraineeInvestor – The pat answer is 10 years, but (I think) it really depends on:
a) whether you can reach your Number if you move into (presumably) more conservative MM301 strategies, THEN
b) the expected market cycle (perhaps + 1 std deviation) of whatever it is that you are MM201’ing in.
@ Jake – If you are interested in TIPS (particularly as a retirement / MM301 tool), google Zvie Bodie and pick up the UK or US version of his book “Worry Free Investing” (or therabouts) 🙂
Hey, thanks for the mention!
The simple-minded investment program (which has been replaced in newer editions of the book) is part of a whole scheme for achieving financial independence. One step in the scheme is “visualizing” (i.e. graphing) your income, spending, and your investment income. The idea is that eventually your investment income exceeds your spending, at which point you’ve achieved financial independence.
You can probably earn a better total return on your investment portfolio with a more sophisticated strategy, but their suggestion does have the virtue of extreme simplicity while also providing considerable security.
@Jake – are there any indicators for changes in the bond yield curve that correlate changes in one part of the curve with another part, e.g. 30yrs go up by X and 5yrs go down by Y? What might be interesting is the stability of these indicators, the measure of their reliability (e.g. x/y = z +/- SD; SD being the item of interest that would be plotted). This might be a good alarm for looking at hedging long equities that are not quite so inflation proof. If the “bond yield curve change correlation indicator stability” (or whatever you want to call it) gets out of whack, that would be the moment to pull out…?? Not sure I know enough about bonds to make a case for this. If I weren’t so lazy I’d either try to find this somewhere or get someone else to make it and then see if it leads gold.
@Jake — the last two posts, Jan 17/19, talk a little about the US and inflation hedging. http://www.philtown.typepad.com/ Also heard the following quote somewhere and found in worth remembering “there has never been a king or emperor in the history of mankind that has been able to keep his hand off the printing press, no paper currency has ever survived”.
@ Philip – Thanks for your Wise Bread articles, and thanks for stopping in to comment.
This blog has a particular slant: my primary readership is interested in retiring Rich(er) Quick(er) than the general population DARES to admit.
For most people, this means climbing higher up the ‘yield curve totem pole’ (e.g. into Value Stocks; Income Producing RE; Small Businesses) UNTIL they reach their Number (e.g. my Number was $5 mill. in 5 years; I ended up achieving $7m7y).
But, once we reach our Number, then I agree: ” extreme simplicity while also providing considerable security” is a virtue 🙂