Bonds produce interest when you hold them (coupon rates.)
There are two ways to calculate the rates so you can tell what’s a performing investment versus a non-performing investment.
Nominal yields = the stated interest rate on a bond
Real yields = interest rate you receive – inflation rate
Why is this important?
As you can already tell most of the investment world and the media operate on nominal yields and act like you are making some great return without giving you the whole picture.
However that’s exactly why so many people are struggling financially because for years they have been earning negative real interest rates (paying to own the asset) but have no idea the theft has been occurring.
It’s a sleight of hand in order for you to continue giving your money away to Wall Street to pay them fees as they accumulate more assets under management (AUM).
As Henry Ford said, if most people understood how their monetary system worked they would revolt by the morning.
How you can use this to be a better manager of your money?
There is a simple way to measure the real rates you are earning by owning bonds or for that matter holding a mortgage or owning bitcoin or any investment.
If you are gaining 100% a year on the bitcoin you own but inflation is really 10% than you are ahead 90%. Great!
100% – 90% = 10%
If you own bonds that are paying you 2% but inflation is 10%, now you are losing 8% each year. Not good.
2% – 10% = -8%
It works in reverse if you are holding debt.
If your mortgage is fixed at 4% but inflation is 10%, meaning you will now pay off the debt with cheaper dollars in the future, you are +6%. This is great!
-4% + 10% = 6%
Now you have the tools to look at investments from the right lens and put yourself in the driver seat of your future.
The learning never stops.
Stay strong,
Brandon
Ps. Tomorrow’s post will be more about inflation and how to calculate the REAL inflation. Just like REAL yields, the government has been hiding inflation from you as well. Spoiler alert: it’s WAY worse than they are telling you.
Note: I am not an investment advisor. This is for informational purposes ONLY.
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Author Brandon Gentile
