I Made Six Figures Off of Boring Interest Rates

Interest rates are boring…until they’re not. Over the past couple of years, understanding interest rates has made a six figure difference in my net worth. I’d like to explain while sharing an evergreen bit of wisdom along the way. I believe it may change the way you think about money and investing. First a disclaimer:

I am not an investing professional or expert. Everything in this article are my opinions and experience. Understand that they may not be appropriate for you or your portfolio. Moreover, investing conditions change constantly and it is up to you to make your own decisions and seek any financial advice you deem appropriate from an expert you trust.

Can’t I Just Index and Forget It?

In the past I have discussed, Why You Won’t Beat the Market But Still Can. In short, it is extraordinarily hard to try to beat the total market index through long term investment picking and market timing. Even if you could somehow outperform the market over 40 years, in the end you may not be any richer than someone who just focused on their career, maintained thrifty spending habits, and put their money in a total market fund like VTI (see Mr Pink in this article as an example). So why would it make sense to keep tabs on the markets, the economy at large, real estate, interest rates, bonds, etc? The answer to this is that if you can understand how all of these things are related, you can get a sense of risk adjusted returns across different areas of investing and business and make creative personal finance decisions.

An Evergreen Lesson For Investing and Personal Finance

The risk adjusted return is not always the same across different investment options and this creates opportunities. The investing environment today is a great example of how something boring like interest rates can become really exciting. I will use this example to show why it pays to understand risk adjusted returns and market inefficiencies to create opportunity. So let’s dive in to how something as boring as interest rates has made a six figure impact on my portfolio over the past few years and driven me to sell all of my rental properties.

When Risk Adjusted Returns Go Haywire

This chart above shows the interest rate yield of a one year treasury.

From around 2009-2016 one year treasury yields sat below 1%. This is pretty boring to me. During times like these I don’t spend much time trying to optimize where the fixed income part of my portfolio is. Why would I? My only focus is to park my cash in something with a positive return that keeps it liquid in case I want to move that cash if something happens. Rates bumped up a little and then the Covid19 pandemic happened pushing rates close to zero from late 2019 through mid 2021. During much of this time I earned more interest in high yielding bank savings accounts than I could have in CDs, treasuries, and even some corporate bonds.

Some inflation adjusted bonds actually went negative in yields during this time (see an article I wrote around this time titled “Investing In Difficult Markets Like This One“). It seems crazy but I was actually taking less risk, had more liquidity, and made a higher return by keeping the fixed income / emergency fund part of my portfolio in a high yield bank account rather than in CDs, treasuries, or bonds during times like that one of very low or even negative interest rates. I also took advantage of it in another way.

When Debt is the best thing in the World: My 1.99% Mortgage

In 2021, mortgage rates hit the lowest they had ever been in US history. In early summer of 2021, I took out a 15 yr fixed rate mortgage on my home at 1.99%.

I did this not because I needed the money but rather because mortgage rates seemed artificially repressed by monetary policy. Mind you, the inflation adjusted average annual return of the stock market over the last 90 years is around 7% and I get to borrow money at less than 2%?! WTF?! I can pay this mortgage off any time I feel like it but in the mean time I get to control all that cash for 15 years and only pay 1.99% to do so (plus mortgage interest payment tax deduction).

If the markets actually do match that 7% average annual performance I could end up with more than a 100% return on this mortgage over 15 years. Of course nothing is guaranteed but even as I write this in October 2023, a 15 year treasury yields just under 5%. Understanding that interest rates were at an all time low kind of sucked for the fixed income emergency fund part of my portfolio but it created this mortgage opportunity. Sometimes boring old interest rates become very exciting.

Interest Rates Suddenly Get Interesting

Let’s look back at that chart of one year treasury yields up above. What has happened from mid 2021 to late 2023? Interest rates have shot up to around 5.5%!! This is very interesting to me. For one, I need to pay more attention to the fixed income part of my portfolio. If your cash is sitting in a bank account yielding no interest it didn’t matter much in 2021 or 2022 when yields were less than a quarter of one percent. However, today you would be losing over 5% annual return by neglecting your cash management.

Why I Sold All of My Rental Properties

I am happy to have locked in my low mortgage rate back in 2021. However, I have also been running single family rental properties for the past many years. Nationally, home prices have more than doubled in the last 10 years. My rents have not doubled in the last 10 years. If you are a landlord I would ask in the comments if your rents have doubled in the last 10 years?

Moreover, let’s say I had sold a property to a single family getting a 30 year fixed mortgage back in 2021 and their mortgage payment was $1000 per month (2.65% mortgage rate). Today two years later that same mortgage payment would now be $1715 per month (8.56% mortgage rate). What effect does this have on potential buyers to pay over 70% more on their mortgage? In an efficient market, one would think that the price of a single family home would have to go down but it has actually gone up at some of the fastest rates in history over the past year and a half:

Over the past year and a half I have unloaded all my rental properties. Interest rates are a big reason for this. I am happy with my decision to sell and lock in some capital gains after years of active income as well (not exactly passive). I also have some local issues with my rental market and am happy to free up my time for other efforts. Housing prices may continue to go up. Rents may shoot through the roof. However, I am certain that housing does not look as strong today as it did two years ago. In fact interest rates are doing all kinds of weird things.

Yield Curve Inversions: When More Risk Gets Less Return

Today is also a great example of how risk adjusted returns sometimes get weird. Usually interest rates for borrowing or lending are higher the longer the term of the loan. This just makes intuitive sense. However, during the government stimulus response of the pandemic, interest rates were held low and stimulus handouts flowed. Now we have high inflation as a result and the federal reserve must raise interest rates to combat it.

As I write this article, the 10 year treasury rate sits at 4.83% while the 6 month treasury rate sits at 5.52%. All other fixed income rates of course follow suit. This means that I can make more money on shorter term loans than longer term ones right now and have more liquidity in my investment. It also suggests that bond traders are putting their money behind interest rates falling in the future and/or are perhaps concerned about a recession.

Investing When The Boring Becomes Exciting

Ten years ago no one talked about interest rates. Today they are the elephant in the room. Boring old interest rates made me more money with less risk when I kept my fixed income / emergency fund in a high yield bank account instead of bonds or CDs for most of 2009-2016 as well as 2020-mid 2021. When Interest rates dropped to the lowest they’ve ever been in US history, in 2021 this sucked for the emergency fund / fixed income portion of my portfolio but presented an opportunity to lock in a 1.99% mortgage. Not boring at all! Now as interest rates are spiking, I am making money in a shorter term treasury ladder with less risk and more liquidity than longer term treasuries or bonds. Lastly interest rates were a large factor in me selling off my real estate portfolio and you can all laugh at or praise me for that decision as we see what the next few years look like.

The Timeless Lesson: A Deeper Understanding Pays

While interest rates are interesting to me now, in 5 years it may be tax policy, corporate bond structures, or a transition to stock picking over indexing for example. The broader lesson that I hope this article conveys is how a deeper understanding of the markets, the economy at large, real estate, interest rates, bonds, etc, can create investing and personal finance opportunities even if you are not a market timer and a stock picker per se. The risk adjusted returns of different investment options fluctuate. A deeper understanding pays.

What do you think of me selling all of my properties and these other moves I made? Am I missing Something? Do you agree with the broader lesson about how a deeper understanding can pay even if you are not a market timer or a stock picker? Please chime in on the comments section below 🙂

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