I recently had a zero-coupon Treasury Bill redeem in the amount of $102,000. This money is part of the 35% of my taxable brokerage portfolio that’s in bonds. Somewhere between a 60/40 and 70/30 equity/bond split is what I like to maintain at age 48, as a dual-unemployed parent alongside my wife.

Given I enjoy investing more than spending, the first thing I did was check the latest bond yields, not the latest Range Rovers. And the bond that jumped out at me was the 20-year Treasury Bond at 5%.

20-Year Treasury Bond Yield Of 5% Could Outperform

One of the problems with the S&P 500 trading at 23X forward earnings is that expected returns are lower due to valuation mean reversion. The average forward P/E for the S&P 500 since 1989 is about 18.5X.

So we must either believe there will be a permanent step-up in valuation thanks to AI-driven productivity, or assume P/E multiples eventually decline back to the long-term average. I assume a little of both.

According to JP Morgan, if you bought the S&P at 23X forward earnings at any time in history, in every case your annualized return over the next 10 years landed between +2% and -2%. Given that backdrop, a risk-free ~5% starts to look mighty enticing.

How Does A 5% Guaranteed Return Sound?

If I was still in my 20s or 30s, I’d say a guaranteed 5% rate of return sounds uninspiring. Back then, as a growth stock investor riding the internet boom, I was chasing 20%+ annual returns.

But now that tech stocks have already boomed since I made my first stock investment in 1996, the ability to lock in capital at 5% for 20 years feels like a win.

The older and wealthier you get, the more appealing a 5% guaranteed return becomes. Here’s a post on how to buy Treasury bonds for your reference.

A Fantastic FIRE Scenario

Imagine you stumbled across Financial Samurai in 2009 as a new college graduate. You maxed out your 401(k), saved at least 20% more after-tax, and invested in stocks and real estate. You want to FIRE!

After 16 years of saving and investing $50,000 a year on average with a 14% compound return, your net worth grows from $0 to $3 million. At 39, you’re ready to retire early at 40. Hooray! You only spend $90,000 a year, so you’re set for life.

Now imagine that $3 million sits in your taxable brokerage account. After retiring and reducing your active income to $0, you can sell investments up to $47,025 as a single and $96,700 as a married couple and pay a 0% long-term capital gains tax. Then there’s the standard deduction, which enables you to earn even more tax-free income in retirement.

If you live long enough, you could shift the full $3 million tax-free into 20-year Treasuries yielding 5%. That’s $150,000 a year in guaranteed, state-tax-free income. You’d be able to boost annual spending from $90,000 to $110,000 while still maintaining risk-free income.

Since 5% is greater than 4%, you’ll never run out of money following the 4% Rule as a safe withdrawal rate. And if interest rates plummet again before maturity, you can always sell these 20-year Treasury bonds for a profit. This should be a dream scenario that is good enough for everyone!

But You Probably Won’t Go 100% Risk-Free

Even though this scenario guarantees financial security, greed (or optimism) usually wins. We still want more, more, moooooooar! But maybe that hunger for more isn’t purely selfish. It can also be driven by selfless reasons.

Personally, I’m no longer investing just for myself. I’m investing for my kids, who don’t yet understand the power of compounding. But within 10 years, they will and hopefully they’ll appreciate the foundation being built for them. And if they don’t value the money as much, I hope they’ll at least treasure the time we spent together during Daddy Day Camp.

That said, this is where DIY investing gets tricky. While the $102,000 redemption could (should) easily roll into Treasuries to maintain my ~35% bond allocation, part of me wants to swing for the fences. Maybe put $50,000 into tech stocks at nosebleed valuations, private AI firms growing the fastest, or even Bitcoin.

I mean, surely a company like AI-defense contractor Anduril, fresh off raising $2.5 billion at a $30.5 billion valuation, will compound faster than 5%, right? In just three years, I could see Anduril being valued at over $100 billion. Too bad there are no guarantees when it comes to risk investments.

All the same, I’m willing to take a risk on such companies with a portion of my investable capital.

Risk-Free Treasury Bonds As Your Financial Bedrock

At the end of the day, a 5% Treasury yield doesn’t have to be an all-or-nothing bet. For retirees and near-retirees, it can serve as the bedrock of your portfolio, covering core living expenses and providing peace of mind.

With that foundation in place, you can still allocate a portion of capital toward higher-risk, higher-reward opportunities without jeopardizing your lifestyle. This is the dumbbell investing strategy in action.

Just remember to review not only your asset allocation within individual portfolios, but also across your overall net worth. Like me, you may have multiple portfolios spread between taxable and tax-advantaged accounts, plus venture capital investments, real estate, or even alternatives like rare books or coin collections.

Security plus upside is what makes Treasuries at today’s yields so compelling. But don’t forget to swing for glory every now and then. Your future self, or your children, will thank you for it.

What do you think, readers? Would you put money into a 20-year Treasury bond yielding 5%? If rates fall, you could always sell early and lock in some gains. So really, what’s the downside to locking in a guaranteed 5% return for a good chunk of your life once you’ve built up a solid net worth?

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JL Collins doesn’t know what the efficient frontier is. The author of “The Simple Path to Wealth” — the guy synonymous with VTSAX and chill — admits this right off the bat when we challenge him with advanced investing concepts.

Collins joins us for Part 1 of a two-part series where we skip the basics and dive straight into the complex stuff. We grill him on whether his simple approach actually beats more sophisticated strategies, and his answer might surprise you.

He concedes that Paul Merriman’s four-fund portfolio probably outperforms his one-fund approach mathematically. But Collins argues that execution trumps optimization every time. Most people can’t stick with complex strategies for 20 years, especially when those strategies require selling winners to buy losers – something that goes against human nature.

Collins prioritizes what works in real life over what looks good on paper. He calls index funds “self-cleansing” because they automatically rotate out failing companies and sectors while rotating in the new winners. You don’t need to predict which companies will dominate next – you’ll own whatever rises to the top.

The episode covers his thoughts on VTSAX versus VTI, international diversification, and why he’d rather put Tabasco than Cholula on his eggs — his quirky way of explaining personal preferences in nearly identical investment options.

Resources Mentioned
Episode 31, Interview in 2016 with JL Collins

Timestamps:

Note: Timestamps will vary on individual listening devices based on dynamic advertising run times. The provided timestamps are approximate and may be several minutes off due to changing ad lengths.

(0:00) Intro

(1:00) JL admits he doesn’t know the efficient frontier

(2:00) Simple vs optimal but complex paths

(4:30) Paul Merriman’s four-fund portfolio vs VTSAX

(6:00) JL concedes Merriman’s approach is mathematically superior

(7:30) Risk parity investing discussion

(8:30) Sequence of returns risk and retirement bonds

(12:30) JL’s birthday email from Jack Bogle

(15:00) VTSAX vs VTI 

(17:00) Total stock market funds across brokerages

(23:30) Mag 7 concentration risk

(27:00) Sears story and self-cleansing index funds

(30:30) International diversification and US dominance

(39:00) World funds versus separate international

(45:00) When to shift to world fund

(47:30) Bond allocation timing strategies

(48:30) Target date funds 

(50:30) One-fund vs two-fund approach

(52:00) Historical diversification and Nifty 50

 

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