If lending money to the government for years is one of the worst things you can do, then this strategy is the smartest.
The 30-year U.S. Treasury Bond is quite possibly the worst investment option out there right now. Even your Uncle Dave's coin and baseball card collection might offer better long-term returns.
Let's forget for a moment about the Fed's intention to taper quantitative easing, which has already begun to place upward pressure on interest rates (and thus downward pressure on bond prices). And let's forget that the longer a bond's duration, the greater its sensitivity to interest rate movements. So with every basis point uptick, nothing will feel the pain more acutely than the 30-year "long bond."
Let's even forget that Uncle Sam's credit rating has already been downgraded by at least one ratings agency.
Even if interest rates don't rise and Congress miraculously balances the budget -- a best-case scenario -- you're still tying up your capital for the next three decades at a paltry rate of around 3.5%. But here's the kicker: when your principal is finally repaid in the distant future, those dollars will have lost much of their purchasing power.
Just ask anyone who bought one of these bonds back in 1983. Maybe they loaned the government $30,000, enough money to buy three average new cars at the time. Now, when they get that money back at maturity, it will only get them one new car.
How much purchasing power do you think your $30,000 will have by 2043?
So if lending money out for 30 years is one of the worst things you can do, then borrowing it for 30 is quite possibly the smartest.
Instead of locking in today's paltry rates as the payee, you're locking in as the payor. Oh, and the lender can't refinance if interest rates move against them, but the borrower can. Finally, instead of loaning full-valued dollars today and then receiving devalued dollars back tomorrow, you'll be doing the exact opposite: receiving full-valued dollars upfront and then repaying with depreciated ones later.
Essentially, taking out a 30-year loan is roughly equivalent to a short position in the 30-year Treasury.
The question is: What do you do with the money?
I say convert the proceeds into real estate, specifically single-family homes.
But don't just take my word for it. Listen to Warren Buffett.
The Oracle himself said it would be smart for affluent investors to purchase not just a second or third home, but "load up" on "thousands" of single-family homes.
While most of us aren't wealthy enough to go out and purchase thousands of homes, there's still a strong case to buy investment property right now.
1. While the overall national housing market has made great strides toward recovery, thousands of quality homes are still listed at bargain (if not fire-sale) prices. Why not take advantage and make those borrowed dollars stretch even further?
2. Real estate is a durable hard asset that should appreciate in value as the dollar slowly weakens. A maturing bond only gives back what you paid in. No more, no less. Meanwhile, an average home that sold for $75,300 in 1983 is worth $247,900 today.
3. That house won't be a vacant, idle asset. Find a tenant and generate steady monthly rental income along the way.
So, let's put this all together with a scenario. You could park $200,000 in a long-dated Treasury and collect about $7,000 in annual interest. And that's all you'll get -- capital appreciation potential is nil.
Or you could invest that cash in a 4BR/3bath Victorian home with a corner lot and rent it out for maybe $1,000 a month, or $12,000 per year. And it's not a stretch to say the home might appraise for $300,000 within the next decade.
Of course, these numbers are purely hypothetical. But scenarios just like this are playing out in thousands of cities across the country. Many of the best deals (the luxurious beachfront condos selling for pennies on the dollar) are long gone. But there are still plenty of attractively priced homes that can generate impressive rental yields of 10% or more.
And unlike publicly traded securities, home prices don't bounce around wildly whenever Ben Bernanke speaks or the latest GDP numbers fall flat.