Investing during a market downturn (Retail Treasury Bonds, Time Deposit Certificates)

Kota beach budyong beach bantayan isla sta fe Cebu camp sawi
My dream job: beach bum

I’m sure many of us are hurting with the current dip in the equities market. I personally am sitting on a -19.87% paper loss on my stock portfolio. I’ve been through worse though in previous years so I feel that there’s some ways to go before the stock market bottoms out. Markets are volatile hence the often-advised “invest only money you can afford to lose.” I must admit that as I get older and the stakes become higher***, my stomach for volatility has become tamer somehow.

 

Staying invested

 

Nevertheless as a long-term trader, I am keeping invested by buying more shares of stocks I already hold. All but one stock are dividend-paying so buying more just means making more in terms of cash dividends.* I have consistently re-invested any money I’ve passively made (passive income) back into equities.

On a macroeconomic level, the Philippines still holds long term potential for me. Gross domestic product looks good and will likely rise with the infusion of foreign capital (as shown by rising foreign direct investment). Government infrastructure spending will probably lead to better industrial and manufacturing output.

On an industry level, I am keeping the status quo. The same goes for the particular corporations I’ve picked whose balance sheets still continue to show profits.

 

Passive income for early retirement

Fixed Income Securities

Other than keeping invested in equities, I’ve started looking into fixed income securities, which are essentially instruments that allow the preservation of capital while providing minimal but consistent income. If you’re the type of investor who wants zero risk to money, then fixed income securities are for you. Your capital is essentially secure while it earns you a little profit. With the volatile market it’s expected to look for alternative investments to get into as a safe haven during this market downturn.

Fixed income securities are useful for those looking to retire early. Unable to sell at a profit at the current stock market or face the risk of loss to capital should you feel the need to sell, fixed income securities provide some buffer and ease your liquidity. I’m going for a portfolio mix of stocks, government bonds and the ever-reliable time deposit certificate. I may go for a balanced portfolio (equal stocks vs fixed Income securities) but I think I’m too young for such a boring portfolio! Haha.

 

1. Government retail treasury bonds

Retail treasury bonds (RTB) (cf treasury bills***) are essentially notes issued by the government to the general public (hence retail) as guarantee of its obligation to pay you (the holder) by a certain date. In return for your money, the government pays a coupon (or the interest). RTBs are just like corporate bonds but widely considered safer as they’re backed by the government, which usually never becomes bankrupt (unless you’re Greece, Venezuela, Spain, etc.) There’s technically still some risk but it’s minimal and price movement is less volatile.

 

  • How to invest in retail treasury bonds

The public offer period for government RTBs was, in my case, terribly short (about seven working days). I had never been interested before due to super low interest rates (1-2% with money locked in for FIVE years), which wasn’t worthwhile for me when compared to the stellar stock market then. In school I Iearned that government RTB interest rates went as high as 10%, historically. In this time of rising inflation, who knows where rates may go?

The current RTBs offered a coupon rate of 4.875% subject to 20% withholding tax. The interest is paid quarterly to your account, providing you a stable passive income during retirement. RTBs now have a relatively shorter tenor of three years (meaning you may not touch your money for such time). Should you need your money before then, you have the option to resell your RTBs in the secondary market at the prevailing market rates.

During the offer period, you simply go to your favorite government bank where you have an account, present your money, bring photocopies of your two valid IDs, fill out some form and voila, you’ve just placed an order for government RTBs. The issuance of the RTBs comes later so for now you’ll receive an acknowledgment receipt. After the RTBs are issued, you will receive a confirmation of sale issued by your government bank evidencing your purchase of the amount of RTBs allocated to you.

 

2.Tax-free time deposit certificates

If you want interest payments that are free from tax, a five-year time deposit (TD) certificate is for you. TDs have been around a long time but for a while banks stopped offering long term TDs exempt from tax. They’re now back in vogue so take advantage! At 4.25% tax-free, these TDs are even more profitable than RTBs. However, your money will be locked in for five years so make sure to place only money you won’t need in the short to medium term.

It must be noted though that at 4% inflation rate, all that these fixed income securities can do is essentially preserve the spending power of your money by growing it at a rate equal to the current cost of living.  4+% interest is well and good but one must consider alternative investments to grow your money well above the 4% inflation rate. On the other hand, these safe securities are safe havens for your money in this crazy volatile market and will be useful during early retirement, which frugal husband and I are currently planning for.

 

No distractions from personal timeline

 

On a personal note, I have chosen to sacrifice a lot of liquidity by sinking money in these securities to remove myself from temptation to deviate from our personal investing timeline. No worries as our emergency funds are intact. Frugal husband and I have plans which require a certain amount of time. All good things, as they say, are worth waiting for. Unfortunately this is something most people cannot understand.

For those of you on this course to FIRE, I’m sure you’ll likewise meet people who are unable to understand why you wish to do certain things or hold off on purchases these people feel you can readily do, given your high income. There’s always pressure to live a certain way given people’s perception of your net worth or income. Choose your own way and don’t be afraid to live differently.

How do you feel about RTBs and time deposit certificates?

George

 

*Of course corporations have the option to declare stock dividends and/or a stock split** in lieu of cash. This isn’t always desirable as shares may lose current value. I personally lost half the market value of my stock during one such stock split!

**More shares are opened up from treasury shares , thereby diluting your share of the proverbial pie (the company).

***In that I now hold greater responsibility for myself with aging parents and thus the potential lack of a parental safety net!

****Generally requires more money and thus usually available to institutional investors

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