Felix argues that the Federal Reserve has inadvertently given everyday investors the best money-making chance in over a decade through its interest rate policies, a fact that is not widely discussed by news, banks, or financial advisors. Felix attributes this silence to some entities profiting from investor ignorance and the widespread fear of an AI bubble popping. Meanwhile, Felix states that sophisticated investors, including billion-dollar funds and pension fund managers, have quietly moved $300 billion into interest-paying investments within the first six months of the year, selling off tech and chip stocks. Felix criticizes the low 0.38% annual interest paid by banks on savings while inflation stands at 4.2%, causing savers' money to shrink.
Felix explains that this opportunity stems from the Fed's actions: cutting rates to zero during the 2020 pandemic, then sharply raising them in 2022 to combat inflation, reaching the highest rates in 15 years. With inflation still above 4%, Felix notes that the Fed is likely to maintain current rates. Felix contrasts traditional "growth investing" (stocks) with "interest investing" (bonds), which has been unprofitable for 15 years but is now revitalized. Felix warns that the most expensive mistake in investing is not picking the wrong stock, but holding a winner for too long and not knowing when to sell, promoting a live session at `whentosell.org` to address this.
Felix outlines a "risk-reward staircase" of five steps for earning income through bonds:
**Step 1: Lending to the US Government.** Felix considers this the safest investment, as the US government can raise taxes, print money, and its default would collapse the global economy. Felix highlights that these bonds are exempt from US state taxes.
**ESOF**: Felix discusses this ETF, which holds super short government bonds (3 months or less) and pays about 3.8% annually, with monthly payments. Its value remains stable, and Felix believes it is a good option for parking an emergency fund.
**USFR**: Felix presents this as a more clever fund with a floating interest rate, meaning payments automatically adjust if the Fed raises rates, so investors are not locked in. It currently also pays about 3.8% annually and is exempt from US state taxes.
**Step 2: Lending to US-Protected Foreign Countries.** Felix explains that these countries (e.g., Saudi Arabia, UAE, Qatar, Mexico, Indonesia) offer higher interest rates than the US due to being separate entities, but their currencies are often locked to the US dollar and they benefit from US military protection, reducing risk.
**EMB**: Felix notes that this fund pays about 5.8% annually, with all loans in US dollars and diversified across several countries, helping to mitigate risk if one country faces issues.
**Step 3: Lending to Strong American Companies.** Felix refers to "corporate bonds," where investors lend money to major companies like Microsoft or JP Morgan. Bond investors are prioritized over shareholders in cases of bankruptcy.
**VCSH**: Felix points out this ETF, which holds short-term corporate loans (1 to 5 years) and pays about 4.4% annually with very low fees (0.03%), offering stable value.
**LQD**: Felix mentions this fund for longer-term corporate loans, paying 4.5% to 5.2% annually. Felix warns that its price can fluctuate more; if interest rates go up by 1%, the fund could drop 7-8% in value, making it suitable for those who are aware of its higher price volatility. Felix suggests a "barbell approach" for pros, splitting investments between short and long-term bonds.
**Step 4: Investing in "Junk Bonds."** Felix clarifies that "junk bonds" refer to high-risk bonds from smaller or highly indebted companies, which rating agencies deem risky. These offer higher interest rates due to the increased risk.
**HYG**: Felix identifies this as the largest risky company bond fund globally, paying around 6.5% annually. Felix explicitly warns that while it offers double the government yield, it is a bet on the economy and can lose 15-25% of its value historically in an economic downturn, making it unsuitable for a "pocket and forget it" strategy.
**Step 5: Tax-Free Municipal Bonds.** This step is for high-income earners seeking to keep more of their earnings by reducing tax liability. Felix explains that these are loans to cities and states for public projects, exempt from federal income tax and potentially state tax. Felix illustrates that a $1 million investment in a savings account yielding 3% might result in $19,000 after 37% federal tax, whereas a municipal bond fund yielding 3.5% could provide $35,000 tax-free.
**VTEB**: Felix mentions this fund, holding over 10,000 city and state bonds, paying about 3.5% annually, with federal tax exemption and low management fees.
**MUB**: Felix also notes this similar fund, paying about 3% annually, also tax-free.
Felix concludes by urging investors to consider activating a "second engine" of interest income in their portfolios, instead of solely relying on stocks and growth, especially since the Fed has revitalized this engine. Felix reiterates the importance of a clear "when to sell" strategy, which he teaches in his live session.