I am reaching the point where I am operating at maximum capacity. In a dream world, I would make this into a 10-part series and flesh out each investing option below. However, I still have a day job.
So, today I will combine a lot of information into a short article. Hopefully, I will dig into these various investments over time because each is unique. I mean this series to be the sister series to the Investing for Dividends (101, 102, 103, 104, 105, 106) articles.
Debt vs. Equity. Our first task is understanding the difference between debt and equity because it is vital to our investing thesis. With debt, you own a piece of a loan. With equity, you own a portion of a business.
Dividends vs. Capital Gains 2
Let’s take your personal residence, for example. The bank owns the debt (loan, mortgage), and you own the equity. No matter the home’s value in the open market, the bank receives payment on agreed-upon terms.
You can experience significant equity gains over the years or turn negative as in 2008. Read my article “RE Lifestyles 2: Investor vs. Lender” to dig a little deeper.
In the above example, the bank actually has far less risk than the homeowner. The bank is going to get theirs, someway somehow. Because of the better safety net, the bank receives less reward. Debt is usually safer than equity but receives less financial rewards.
Risk versus rewards. It would be awesome to be 100% invested in blue-chip dividend-paying stocks—until it’s not awesome. During bull markets, you would be the smartest person in the room. However, once a bear market approaches—not so much.
Sometimes the certainty of debt, in the form of bonds, can comfort you during rough times. Debt is sometimes called “fixed income.” You may see that term from time to time. Don’t be fooled; the bond market is far larger than the stock market (equities).
How to Create Passive Income 104: For The Average Person
However, it is much harder for the average person to get involved in the bond markets. Plus, we don’t need to play the same game as hedge funds and pension funds. We have many tools to utilize bonds in our portfolios.
The book “Step-by-Step Bond Investing” is a great reference to get you started on your journey. But why invest in debt at all?
Why invest in bonds? The equities market can become complex very quickly. If you don’t spend at least an hour a day reading over the markets, you can quickly fall behind. I read an article yesterday about if Apple stock is overpriced (at $174 on December 10, 2021). Only time will tell how that debate turns out.
With debt, your main question is if the company is solid or not. Debt sits much higher on the chain of command than equity. This means that if the company goes under and has to liquidate assets, debt holders would receive payments before shareholders (equity). Here is a picture of the capital structure from Pentamezz.com.
As you can see from the chart, debt is above common equity. You can also see where preferred shares fit into the capital structure. Here is my series on Preferred Shares (101, 102, 103, 104, 105). It is always good to know where you are allocating your investments.
Choose Your Passive Income Adventure 2
With bonds, we are making much more secure and stable investments at the cost of capital gains, dividend increases, special dividends, and mergers. That is why it is good to strike the right balance of fixed income and equities.
The right mix. So what is the right combination of stocks and bonds? I just asked this question in my article “Stocks vs. Bonds: Is 60/40 Still Effective?” Every single person, family, and situation is different.
You have to review risk tolerance, age, retirement plans, and knowledge of the market. Also, ask yourself how much time you want to allocate to tracking the stock market.
As I wrote in “Living Overseas Passively 107: Cryptocurrencies,” I want to pay all my expenses with a fixed income. In the crypto space, that would be a stable coin like USDC (which is paying 9%).
How Would You Spend $5,000?
In the bond market, I would love to have $2,000/month of income from 30-year Treasury Bonds. Currently, they are yielding 1.875%, which means they are too expensive for my taste. I would like to see them at a 4% yield, and then I am a strong buyer.
At a 4% yield, I would need $600,000 invested for receiving my $2,000/month—a goal to strive for in the future. With USDC and a yield of 9%, I would need $266,667 invested.
What is your number? I would start with a passive income number you would like to obtain from secure debt investments. Of course, you would still have your dividend growth and income portfolios, but bonds are an excellent hedge or safety net.
I love investing for interest just as much as I love investing for dividends. It’s just another way to diversify your retirement planning and passive income. Understanding debt and equity help you become a bonafide investor.
Retirement Planning in Your 40s
Investing for Interest series. I am just getting started here. I will wrap a few topics together to condense the series a little. Let’s review my future topics.
- High Yield Saving Accounts (102)
- Certificates of Deposit (102)
- Series “I” Bonds (102)
- Series “EE” Bonds (102)
- Treasury Bills, Notes, Bonds, Tips (103)
- Mortgage-Backed Securities (104)
- Collateralized Loan Obligations (104)
- Corporate Debt (104)
- High Yield Corporate Debt (104)
- Baby Bonds (104)
- Real Estate Notes (105)
- Cryptocurrencies (106)
Please bear with me as I try to get this completed. I know that bonds and debt are not exciting topics, and I don’t expect an overwhelming response. However, understanding debt, bonds, and fixed income are vital to long-term success and building wealth slowly.
Conclusion. Start thinking about how much money you would like to have “outside” the stock market. Again, when the market goes up, everyone loves the game. When the market heads down, we see who is prepared or not.
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Disclosure: I am not a financial advisor or money manager, and any knowledge is given as guidance and not direct actionable investment advice. I am an Amazon Affiliate. Please research any investment vehicles that are being considered. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. All Right Reserved Military Family Investing
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