Posted October 19, 2021
By Zach Scheidt
Introducing the New "Treasury Bonds" for Retirees
"Don't buy Treasury bonds!"
That's the message I've been trying to get across to you for the last several months.
I'm especially worried about long-term Treasury bonds because of the huge amount of risk they carry.
I understand this may sound crazy.
After all, Treasury bonds are backed by the full faith and credit of the United States. They're supposed to be the safest investments you could possibly own.
But that's just not the case.
Fortunately, there are some pretty good alternatives out there. And today, I want to make sure you're aware of a group of investments I'm going to start calling the “new Treasury bonds."
If you're still holding Treasuries (or mutual funds that invest in Treasuries) as part of your retirement savings, you should definitely consider making the switch today.
Riskless Return... Or Returnless Risk?
For years, traditional wealth managers have recommended owning safe Treasury bonds in your portfolio. These bonds are considered a cornerstone of a good long-term investment strategy by most professional investors.
The appeal of Treasury bonds is that they’re supposed to offer "riskless return."
A Treasury bond is basically a loan to the U.S. government. And since the U.S. government guarantees they will repay the money (and they have the ability to create currency to repay debts), you can rest assured that when a long-term treasury bond matures, you'll get your money back.
But in today's market, getting repaid isn't the biggest risk you have to worry about...
A much bigger risk is the problem of inflation. And the longer it takes for your bond to mature, the less that repayment will be worth.
Meanwhile in the years between now and when your bond matures, you'll miss out on the money you could have made while the government had access to your cash.
Oh, and don't forget...
When interest rates rise, the price of your long-term Treasury bonds drop. This is because when interest rates are higher, another buyer would require a higher rate of return for buying the bond you hold. And the only way to get that higher return is to buy at a lower price.
So if you have an emergency and need access to your cash before the bond matures... you're out of luck!
Of course since interest rates are so low right now, bonds that you currently own pay next to nothing.
So while in the past, Treasury bonds may have been good investments for retirees, they're now full of risk (with nearly no potential return).
That's not what you want for your retirement savings!
A Better Alternative: Bank Stocks!
If you're like many of the retirees I talk to, you may not have a great view of banks.
Many of us who lived through the financial crisis remember the banks being a big part of the problem. In fact, the big investment banks who offered risky loans, created financial derivatives and took on too much leverage actually caused people on Main Street a lot of heartache.
I get that. I was angry then. And I'm still not ok with the way everything turned out.
But just because one industry didn't play by the rules (or bent the rules in their favor) back in 2007 doesn't mean you shouldn't profit from them today.
Many of today's banks are much different from the banks that caused the problems in 2007 and 2008. And as our economy marks a major turning point, bank stocks are becoming very attractive investments!
To be clear, I'm specifically talking about regional banks. These are the traditional banks that lend money to businesses and individuals, and set up checking, savings and money market accounts.
The big Wall Street investment banks are a different animal entirely. Those firms are making good money right now because the stock market is strong. Mergers and acquisitions also add to these mega-bank profits along with big financial transactions that generate lucrative fees.
There are some good reasons to invest in the big Wall Street banks. But the stocks have some unique risks as well. We'll talk about those stocks another day.
Regional banks are in great shape right now because of the rise in interest rates.
When rates are higher, these regional banks are able to lend money at the higher rates. And that leads to bigger profits. It helps that the great reopening is in full swing which means many local businesses are counting on their local banks for loans to get back up and running.
Here are two reasons you should consider investing in these banks instead of investing in Treasury bonds.
First, regional banks have a lot of room for profits to grow.
After years of low interest rates, these banks have had to cut expenses in order to stay in business. Now, the banks are lean with strong balance sheets. So as interest rates move higher, profits should jump exponentially.
Second, most regional banks pay healthy dividends.
Remember the treasury bonds that we want to get rid of? Those bonds now pay paltry amounts of income that don't do much to help cover your day-to-day expenses.
But dividend-paying regional bank stocks can give you significantly more income. Meanwhile, as profits grow, the banks should start boosting these dividend payments which will help your income grow.
So if you buy bank stocks instead of Treasury bonds, you can own an investment with potential to trade higher and potential for much more income.
I'll take that any day over the "returnless risk" we get from Treasury bonds.
You can start by looking at the SPDR S&P Bank ETF (KBE) which is a basket of regional bank stocks. From there, I'd suggest looking at a few of the fund's components — or the stocks the fund is invested in — to pick out your favorite bank stocks.
If you do, please let me know which banks you picked out! Just send me an email and fill me in.
Here's to living a Rich Retirement,
Editor, Rich Retirement Letter