As my investment journey continues, I’m learning that there is value in diversifying and maintaining a steady cash flow. My portfolio leans greatly towards growth stocks, and I believe that they will continue to outperform in the years to come.

But I think it is sensible to allocate gains from the growth portfolio to the fixed income side once in a while. The cashflow allows me to cover my monthly expenses while not selling my stocks at disadvantaged prices. Right now only around 25% of my portfolio is in fixed income products, and I’ll like to double it eventually.

So I’ll be allocating $30,000- $40,000 to the Blackrock China Bond Fund. Here’s the breakdown provided by my bank.

It’s classified as a medium-risk investment. Most of the fund’s top holdings are mostly Chinese state-owned enterprises of banks and energy companies. I’m pretty sure that the Chinese government will never allow the vast majority of them to fail. And since its a fund which contains hundreds of different holdings, I’m also certain it will never go to zero.

In addition. the pricing is attractive, much cheaper and thus higher yielding than Western and Singapore fixed income investments. The China fund is trading at a fairly low level of $9.87, not far from Mar 2020 levels of $9.60. Those are crisis levels I don’t expect to see again within this decade. The risk-reward is pretty lopsided in my favor, at 13%-14% leveraged return for government-backed bonds. Still, pricing seems to be on a downtrend, so I would keep my expectations for appreciation low. As long the price doesn’t keep going down, I’ll be happy.

While I don’t like how the Chinese government operates, I will admit that they can handle the economy. Sectors are carefully managed and I can count on it being stable. While the collapse of the Chinese system has been predicted by Western economists for decades, it hasn’t come close to coming true. Honestly, it’s the Western banks and governments which seem weaker, hold more debt, and in greater potential trouble. At least China has taken steps to deleverage and stop speculation, while the U.S and European governments seem hapless.

I’ve mulled over this purchase for quite a while because I believe the returns from equities will outpace bonds, as it tends to do. But returns from stocks are lumpy. Some years will be spectacular, while other years I won’t be able to draw money out. For example, the entirety of 2021 was a bad time to have cashed out on growth stocks. If I had relied on selling stocks for my daily expenses, I would have been screwed. But fixed income would have continued to pay out.

Another concern is that we are in a rising interest rate environment. Conventional wisdom is that with rising interest rates, the pricing of bonds will go down. So my principle would be reduced, effectively reducing the overall return. So I wouldn’t be too surprised if my final return would be lesser than the advertised.

Still, we never know how things might go and we might have low interest rates for decades. I think it’s good to spread your bets a bit, as things seldom turn out exactly as planned or predicted.

With this, my passive income will increase by about $500 a month, just below $5,000 a month. This should be enough for my monthly expenses. I’ll continue to shift some gains from growth stocks over time. When my leveraged annuity matures in 2025, my monthly passive income should be about $6,000. I think an overall goal of about $7,000 will be very comfortable, and achievable within the next 3 years.

Barring any last-minute events, I expect my RM to come over within these next couple of weeks to sign the loan. Purchasing funds through preferred banking takes longer than stocks as I will need to sign various documents and agreements. Should expect to see this start paying out in July.

What’s your own passive income idea?

4 thoughts on “[Premium] My Next Passive Income Investment

  1. hi FI35, thanks for the sharing 🙂 May I know what is the monthly distribution amount from the BGF China Bond Fund and how is it work out ? Looking at the prospectus the annual distribution for 2019 is 7.43% and 2020 is 5.46% (price of bond $10 to $9.87). How much do you pay for the initial sales charge – 5% max? How do you get 13%-14% leveraged return ? Thanks, BK

    1. Hi BK, I’ve added the breakdown provided by my bank in the post, which answers your questions. I’m paying 1% sales charge instead of 5%. I heard other banks are charging 1.5% and up though.

      The leveraged return can be achieved through the 80% loan-to-value (LTV). Since you are putting down only 20% with the rest being loaned from the bank at 1%-2%, double digit returns are quite possible.

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