This is the last of a 4 part series on getting into investing. In this part, I will try to take away some of the mystery behind Treasuries and investing in other countries. Dont let the big words scare you – you are smart enough to figure this shit out! Ok, here we go:

What is a Treasury?

A treasury nothing more than an IOU from the government. Just like with bonds, you are lending the government your money with the promise that they will return your money plus yield on coupon (the amount of interest that the government will pay to you for holding the bond until maturity). Simple, right? Have you ever heard somebody say “If I won a million dollars, I would invest it and live off the interest”? Well the safest way to make sure you never lose any of that million and have guaranteed interest is by using Treasuries.

There are four types of treasury securities: Treasury bills, Treasury notes, Treasury bonds, and Treasury Inflation Protected Securities (TIPS).

Treasury Bills mature in one year or less. Maturity means the government pays back all the money you invested, plus the interest they owe you. Even though you dont get any interest off T-Bills, you make money on them because you buy them for a discount and you sell them at face value once they hit maturity: You buy a T-Bill for $50, a year later (once it hits maturity) you redeem them at your bank and get $100 back (face value). Another example would be let’s say you buy a 13-week T-bill priced at $9,800. The U.S. government writes you an IOU for $10,000 that it agrees to pay back in three months. You will not receive regular payments as you would with a Treasury Note or Bond. Instead, the appreciation – and, therefore, the value to you – comes from the difference between the discounted value you originally paid and the amount you receive back ($10,000). In this case, the T-bill pays a 2.04% interest rate ($200/$9,800 = 2.04%) over a three-month period.

Treasury Notes (or T-Notes) mature in two to ten years. They have a coupon payments every six months, and are commonly issued with maturities dates of 2, 3, 5, 7 or 10 years, for denominations from $100 to $1,000,000 – That means with $100 you could get in the game. The coupon of a bond is the amount of interest paid every year expressed as a percentage of the face value of the bond.

Treasury Bonds have the longest maturity, from twenty years to thirty years. They have a coupon payment every six months like T-Notes, and are commonly issued with maturity of thirty years. If you buy a $1,000 bond with a coupon of 10% and a maturity in 20 years, you will I receive $50 every 6 months regardless, and that stops at the end of that 20 years.

Treasury Inflation Protected Securities (TIPS) are designed to do one thing: protect against inflation. TIPS pay interest every six months and are issued with maturities of 5, 10, and 30 years, just like every other Treasury. The difference is that the coupon payments and your principal are automatically increased to compensate for inflation as measured by the consumer price index. These are good to get into when the national debt goes up, during wars, or when the government increases taxes (because as taxes rise, suppliers often pass on the burden to the consumer – meaning it will take more money to buy the same thing that costed less than before the tax increase). If youre interested in learning more about TIPS, check out this great article at US News.

So going back to my earlier example of living off the interest of a Million Dollars, you could buy a bunch of Treasury bills, bonds, and notes, with $10,000 worth reaching maturity every month for the next 30 years and you would never have to worry about a thing (If your yield is just 3.6%, $10,000 per month x 12 months x 30 years = $3.6 Million). Investing in treasuries is designed to keep your money safe, not to make you money – so you wouldnt get the compound interest that you would from investing in a ROTH IRA or 401k, but you would at least know that the market cant wipe out your principle.

Buying Treasuries

You can either buy Treasuries directly from the government, or through your bank. The government has set up a website to allow you to buy debt at Treasury Direct or you can use the automated phone system – 800-722-2678.

A Side Note

Treasuries are important because just like if I lent you money, I could come back out of the blue and say “I need my money back right now or youre dead”, any other country or company can call in the U.S. Government’s debt whenever they wish. Here are the countries or companies that have the U.S. by the balls:

Top Foreign holders of U.S. Treasuries (As of September 2009):

Source: the United States Treasury.

So in the chart above, we see that China and Japan literally owns our ass. The U.S. government has never defaulted on a loan, and it would take a mighty big catastrophe before the U.S. Treasury could collapse. But that doesnt mean it cant happen. But thats my two cents, and very soon I will release a podcast/youtube video breaking down the economic system that has enslaved us all – and how you can set yourself free.

Investing Overseas

There are alot of good reasons to invest in other countries: China, India, and Dubai have all expolded in growth, the American economy has become unstable compared to some other European and Asian countries, and the value of the dollar has fallen, making the goods that we sell to other countries cheaper and less profitable. At MSN Money, the published an article in 2005 entitled Invest overseas for double the payoff. Author Jim Jubak gives you two good reasons to get in overseas markets:

If you buy the right kind of overseas income investments (stocks, bonds or mutual funds), I think you stand a good chance of:

1. Earning a higher yield than you get on comparable U.S. assets, and
2. Seeing greater price appreciation than in the U.S. markets, as declines in the U.S. dollar translate into higher prices in euros, yen or Australian dollars.

There are two easy ways to invest overseas:

Buy International Stock Funds. You can find these anywhere you invest (Sharebuilder, eTrade, etc.) You will find categories like Diversified Emerging Mkts, Diversified Pacific/Asia, Europe Stock, Foreign Large Blend, Pacific/Asia ex-Japan Stk, and World Stock. Order a prospectus from Profunds, Oppenhiemer Funds, or Touchstone Investments. The prospectus will look like alien handwriting when you get it, but remember, youre smart enough to figure it out just like I did. Ask questions in the comments section if you need to!

American Depositary Receipts. ADRs are certificates that entitle you to shares of a specific foreign stock – its just like buying a stock, pretty much. They are listed and traded on major American exchanges and are denominated in U.S. dollars. There are hundreds of ADRs out there, mainly from major foreign companies, so it’s not hard to find a nice addition for your portfolio. You can buy them direct from JP Morgan, or from sites like Sharebuilder.com. Make sure you do your homework, just like you would any other purchase.

Check out Morningstar for some of the best and worst performing ADRs from last year.

So thats it! You should be ready to get in, get your feet wet, and make some money. The important thing is to take some action on this new info RIGHT NOW! Order a prospectus, buy a book from some of my reccomendations, and create a Sharebuilder profile. If youre a latecomer, go back and check out the first three parts of the Welcome to Wall Street Series and get in the game. ASK QUESTIONS IN THE COMMENTS SECTION, AND EITHER I OR OTHER READERS WILL ANSWER THEM! I cant invest for you, so its up to you to get started and put this info to use. Owning investments is one of 4 points in any wealthy mans financial crown, a crown you will never wear if you dont get into the game.

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