Leibel On Fire! Low-Interest Rate World
Full:
With interest rates falling, where should investors turn to get more bang for their
buck? Hi everyone, I'm Freddie Bell. Join us this week as we talk about where to
find yields for you in a low-interest rate world on the next label on fire.
Welcome to this episode of label on fire. As I mentioned, I'm Freddie Bell and I'm
with label Sternbach. He is Amazon's best -selling author of living with financial
anxiety and also author of the book authenticity. We want to make sure we get that
right. Label, welcome back and it's so good to be with you. Hey, how are you doing
on this winter day? Well, I am, and the next word could be cold, but we won't go
there today.
As I mentioned in the open, we have interest rates falling. We've talked quite
a bit in the past about what the government would do with lowering interest rates
and adjusting that rate. I'm wondering where should investors turn right now to get
more out of their charter and dollar, and I'm wondering what we can do to maximize
what's happening around us, those things that we can't manage. What can we latch on
to right now that we can't? Those are great questions. So let's take them one piece
at a time. Let's talk about interest rates. Okay. So when I was first becoming
aware of finances and I was starting to plan my retirement, banks were offering
five, six percent interest rate, and that was the norm. like my entire childhood,
that was the norm. You got five, six percent, right? And that was everyone's
retirement plan. You got, you put away your half a million, million dollars and then
you put it in bank CDs and you earned your five, six percent, right? And maybe you
went to the smaller banks or the credit unions and got an extra percent or two.
And you lived off the interest from your bank CDs. And that was for many
retirees for a very long time. that was a very viable strategy. And then what
happened? 9 /11. 9 /11 comes along. And in order to stimulate the economy,
we go on a war footing and we drop interest rates basically down to 0%. And
overnight, the retirement strategy for so many people just disappeared. And for most
of the last 25 years, interest rates have been really low, right? Historically low.
Over the last few years, they've recovered, but it's coming back down. And the world
wants interest rates to be low. Silicon Valley wants interest rates to be low. When
interest rates are low, it's basically free to borrow money, invest it in other
things, and those other things pay out a whole lot more than what you would get in
terms of interest. So it's a net benefit to everyone all around except for us that
want our money to be secured and want a consistent paycheck off of that money
without having to take risk. So the question becomes, okay, where do we get, right,
as interest rates fall as we go back to more the recent historical average of
somewhere between zero and two, 3 % interest rates, what do we do? Where do we look
forward to get some of yield, right, without having to take on risk. And I want
to, before I go into kind of the specifics, I do want to kind of put this in the
context of that we have one large investment being out there and all they're coming
out with the projections for the equity markets over the next 10 years. And a lot
of them are projecting that the average return over the next 10 years is going to
be three three or 4%. And they're projecting this for a number of reasons,
but the biggest one is that right now the market is really heated up. We have
valuations in the United States that we haven't seen since almost the dot -com
bubble, where companies are at 20, 30, 40 times multiple of their earnings.
That means that investor would have to, the company in order to capital to the
investors would have to make the same amount of money that they're making today for
the next 30 to 40 years, which is an insane amount of time, right? Nobody thinks
that the world is going to be the same in 20 years from now, let alone 40 years
from now. And then that's a long view. Right. It's a very long view. And it's a
very, I mean, it's unrealistic. So the question is, right, do those prices have to
come down, right? Are they going to come down or is growth going to slow or are
companies going to fail and other companies are going to come into existence? And
there's a lot of betting that's what's going to happen because of AI, because
something that we've talked a lot about on the show about on shoring, where we're
bringing back chip manufacturing from overseas. We're bringing back the critical
national security interest industries back to the United We, we also have Trump and
the rhetoric that he has of tariffs and controlling China. And how exactly that
plays out is anyone's gas, right? We know what the administration wants to have
happen. They want to bring manufacturing back home, but is that actually what ends
up happening? Who knows, right? We can end up in an extended trade war and that
wouldn't be good for anyone. So anyways, long story short, right? the question is,
where do we get yield without getting risk? And you can just turn to the equity
markets and say, well, I'm going to go invest in equities and I'll do a 60 /40
portfolio, right? Which that's your traditional solution is, okay, as interest rates
fall, we take more exposure on the equity markets because that's where we'll get our
yield. And there's kind of this dichotomy that exists in there. So as savvy
investors who are afraid of the future, because We've been through a 2000. We've
been through what it, when everyone thought the internet was the big greatest thing,
but it took 20 years to realize the greatness of the internet, right? Amazon started
in, I think it was 2003, which was at the end of the dot -com bubble. And they
took advantage of what everyone was hyping of the 90s, but even Amazon didn't show
profitability until the late 2010s, right? We're talking about sometime in the last
so having said that what do we do as investors and really the there's only a few
answers to that question but the simple version of it is what we need to do is we
need to take on the least amount of risk possible to get the greatest return right
and so when we look at the last few years the least amount of risk was we give
it to the federal government we buy treasuries we get you know 5, 6 % return on
our investment over there, right? No risk, right? If the United States starts failing
to pay on its debts, well, the world economy has really got bigger problems. But
then you gotta ask yourself the question, okay, as those rates come down, what's the
next best thing, right? Next best thing is government agencies, right? So government
agencies, they're not quite backed by the taxing power of the United States
government. so they have to pay a little bit greater return. But at the end of the
day, it's the United States government agency, right? Like they're the FEMA, you
know, these big government agencies that have to do big capital works,
they put out bonds. We can buy those bonds if he's an extra one or two percent.
Then you have, you know, you start going down the table of, you know, taking on
more and risk and you have it while you have huge companies like IBM is probably
not going anywhere, right? They've been around for over 100 years. They're probably
going to be around for another 100 years, not because they do anything amazing, but
because they've embedded themselves in so many facets of life that it's just
impossible to remove them, right? Same thing with Microsoft, right? Microsoft, I think
I saw a stat, it was something like 70 % of government computers run Microsoft,
right? The government can't afford from Microsoft to stop functioning. Same thing with
Google, right? Google, you can buy bonds from Google, you can buy bonds from
Microsoft, you can buy bonds from these major companies foreign, right? And they have
to pay greater interest rate because they are not the federal government, but their
risk of them defaulting is still pretty minimal, right? They're going to be around
for the long haul and we can stick it out, we're going to get that money. And
especially if they're giving us a bond that's, you know, a year or two years, it's
not a huge long -term thing, right?
And so what I'm getting at is what we need to do is slowly ratchet up that risk
that we're taking on But we need to do it in a very controlled way so that we're
not taking on more risk than we need to right so right now Interest rates are you
know, somewhere about four four and a half percent depending on where you're going
It's probably going to come down to closer to the 3 .754 after this next FN
meeting. But what that means is, okay, our base can still be, let's say 60%,
it can still be federal treasuries, but we need to start giving 10 % more to a
little bit more yield, 10 % here to a little bit more aggressive so that even if
something catastrophic happened with those, we're only looking at a few that loss,
but in exchange for that risk, we're getting so much more and we're getting back to
that six, seven percent return that we really need in order to have that sustainable
lifestyle and retirement with minimal risk. The advisor like you would help manage
between those buckets of private sector, government agencies, the Fed or the Treasury?
Yep. That is one of our full -time jobs is managing that and managing that risk,
right? So that it kind of dials in to what the expectation for the future is.
It's something that I want to point out, where we're going through the process of
launching some ETFs that do similar type strategies. And in the process of going
through that, right? Like I had a big idea as a financial advisor, I knew that
there were restrictions on what mutual funds and ETFs could do. So when you think
about Vanguard and BlackRock and iShares, they all have these target -based funds and
they all have these retirement portfolios and you're like, "Well, I'll just go put
my money in them." And I was the same way. I was like, "Well, I'll just go get
something off the shelf." And then I started looking at it and something that we
noticed over the last few years was everyone knew interest rates were gonna go up,
which meant that You wanted to sell certain things and you wanted to buy other
things. And then as interest rates were coming down, right, the same thing, there
are moves that you want to make ahead of that because you know what's going to
happen. As interest rates come down, the price of bonds are going to go up in vice
versa. So take advantage of it, right? But these mutual funds and these ETFs did
not. And the reason is that they can't, because when they file their prospectus with
the SEC and they say, "This is what our investment policy is. This is how we're
investing it." They're stuck with that, right? It takes a lot of money and a lot
of effort for them to change that. And they're not gonna do that, right? They're
not gonna risk the billions of dollars that they have sitting in these mutual funds
that they're collecting fees on for doing what's right by the investor, right?
They're just gonna let it sit, let it ride. And if people wanna move, they'll
launch a new product, which Vanguard just announced that they're launching a product
very similar to what we're doing, because they're like, "Free money is ending." Well,
great. Why didn't you do this two years ago? So, it's interesting. So as the
transition happens between the existing presidential administration and the new one
coming in, investors can take a bit of a sigh of relief and say, "Okay, we're okay
because we've got a number of different strategies, a number of different buckets and
will help us to take advantage of the interest rates no matter what happens. Yeah,
and more importantly, it's about gradually ratcheting up that risk as the market
dictates us. As our opportunities diminish, our opportunities for risk -free return
diminish. We need you to be smart about taking on the risk that we want to take
on, so that we're taking on the minimal amount And allocating that across time,
right, so that the money that you need for the next few years that you're going to
live off on is minimal risk, right? The money that you're going to have in three
or four years from now that you can replenish that, that you take on a little bit
more risk, which protects your long -term money, right? So that it can grow and get
that full market return that we all know and love. We covered a lot of ground -to
-day label, but I know there's a lot more. Where can Our listeners and viewers get
more information about falling interest rates and how we can leverage ourselves as
smart investors. Yields4U.com is always your best resource. We done have a whole
bunch of calculators and articles on there and always feel free to book a call with
us. More than happy to talk with you, look over your portfolio, give you our two
cents. All right. Thank you, Leibel. I'm Freddie Bell. We got to leave it right
there. This is Leibel on buyer, join us the next time when we talk about the new
tech bubble on the next label on buyer. Bye now.
