Gyroscopic Investing

I have almost as low a default risk as US Treasuries. I am not exposed to interest rate risk. When my owner turns 82, I will pay him a monthly coupon of $6135 per month until he passes, which is taxable, and the Internal Rate of Return (IRR) of all of my cash flows before taxes is 6.5% nominal.

What kind of "bond" am I?

ochotona wrote: ↑Wed Aug 09, 2023 11:40 am
I have almost as low a default risk as US Treasuries. I am not exposed to interest rate risk. When my owner turns 82, I will pay him a monthly coupon of $6135 per month until he passes, which is taxable, and the Internal Rate of Return (IRR) of all of my cash flows before taxes is 6.5% nominal.

What kind of "bond" am I?

I'd say it is definitely an annuity as William Bernstein always says that buying an annuity is just the same as buying a bond from one single company in that you are depending upon that company to stay in business to fulfill its obligations to you.

yankees60 wrote: ↑Wed Aug 09, 2023 11:46 am

ochotona wrote: ↑Wed Aug 09, 2023 11:40 am I have almost as low a default risk as US Treasuries. I am not exposed to interest rate risk. When my owner turns 82, I will pay him a monthly coupon of $6135 per month until he passes, which is taxable, and the Internal Rate of Return (IRR) of all of my cash flows before taxes is 6.5% nominal.

What kind of "bond" am I?

I'd say it is definitely an annuity as William Bernstein always says that buying an annuity is just the same as buying a bond from one single company in that you are depending upon that company to stay in business to fulfill its obligations to you.

It's a QLAC annuity, correct. Yes, I'm depending on New York Life to stay in business and honor their contracts until mid- 21st Century (A++ A.M. Best, Aaa Moody’s AAA Fitch, AA+ S&P, inception year 1841).

Remember... the IRR is 6.51% per the contract. The coupon rate for investment grade corporate bonds is 5.something%. The standing of policyholders in a bankruptcy proceeding is way, way, WAY ahead of any bondholders. They will get paid, bondholders take a haircut, shareholders get zero.

What if my gold dealer cheated me with clever counterfeits? What if TreasuryDirect locks me out and I can't convince anyone to let me back in, or they won't let my heirs in? What if SPY takes an 80% haircut? What happens to long bonds if 30-year rates go to 7%? So many "what if's"... what's the answer?

Diversification. The QLAC is one of my diversifiers. It was way less than 10% of my portfolio. I'm pleased with the purchase.

So I was updating my investments spreadsheet... and I had to subtract $200k from my IRA, because it went to the QLAC. But then I started a new row in the spreadsheet... "Present Value of QLAC using 13-week T-Bill as risk-free rate". I found that the PV was $250,000. So in a sense I have added $50,000 of value to the portfolio. This value only gets realized if I live to age 95, which is pretty optimistic. If I die before then it won't be. But when I die, I won't care either way! And if I live a long, long life, I will most certainly value the continued cash flows.

ochotona wrote: ↑Thu Aug 31, 2023 11:38 am
So I was updating my investments spreadsheet... and I had to subtract $200k from my IRA, because it went to the QLAC. But then I started a new row in the spreadsheet... "Present Value of QLAC using 13-week T-Bill as risk-free rate". I found that the PV was $250,000. So in a sense I have added $50,000 of value to the portfolio. This value only gets realized if I live to age 95, which is pretty optimistic. If I die before then it won't be. But when I die, I won't care either way! And if I live a long, long life, I will most certainly value the continued cash flows.

Seems to be a fair way of viewing it all!