A letter from a worried reader helps show how inspired investing works.
“I keep receiving messages from various sources warning that the US and world economies are on the verge of economic collapse. Debt, derivatives, and inappropriate decisions are going to crash us into a monumental depression. The arguments behind these messages sound more credible than the stories of imminent prosperity. So I feel that the odds are that they are likely to be right.
“Now how to survive the coming calamity? I am retired and trying to live off the income from my investments. I have put money into Jyske Bank in the forms of a Multi-Currency Sandwich and bank stock.
“My question is how strong is Jyske Bank if the world economy takes a big hit? Are they likely to survive without losing my money in the process? Are there safer places to put retirement funds and still produce income?
“Your help will be appreciated.”
I asked the eClub advisors to help with this and here was Teddy Christiansen's reply:
“Dear Sir,”If you need a steady income during your retirement, you can only counton an income on Bonds, Government AAA Bonds, or mutual funds based onA-rated bonds. And the rates are quite low at the moment, at highest4-6.50% per annum.
“Enron, Worldcom and other large corporations can disappear and the sameway your stocks. Of course if you have diversified your stock portfoliothrough a mutual fund your risk is not as high.
“A multi-currency sandwich is from my point of view a game with interestsand cannot be considered as a safe and solid investment with a reliableannual income – this is only to be considered a risk for your reserves you will probably never need.
“Most investment with banks today are equities, mutual funds and bonds.These investments are not a part of the bank's assets/debts and do not showin the books. The bank is only holding these as safe custody and youwill have to rely on the issuers. Only bank accounts are directlyinvested in the bank, subordinated capital and the bank owned stocks areat risk. In some countries the accounts are covered by the Governmentpartly or totally.
“If you think that the world will face a collapse in the finance marketand economy, gold and other precious metal might be a part of yourportfolio. Unfortunately these items do not give you an annual income.
“I might live until I am 80 years old or more, or I might die next week,the risk is always there, so I will try to live while life is there. Wealso have to consider something in the world must be good, and it is notalways going to be as bad as predicted.
To live off your investments with super safe investments you must be willing to accept what the market offers at any one time for AAA rated government bonds. These are the safest investments in the world, if you do not take inflation into account. We'll look at inflation in a moment. Today such investments yield about 4.5%. If you have sufficient capital to live on with such investments, then by all means put as much cash as you need into these vehicles and enjoy clipping the coupons.
The rub usually comes when retired people do not have sufficient capital to live on a 4.5% return (still forgetting for the moment inflation). Then the temptation is to either increase risk or to spend capital. Either option increases danger and creates problems down the road. The better answer is either to reduce spending or increase income outside your investments with a job or with your own business activities.
Certainly using the Multi-Currency Sandwich increases risk and this tactic should only be used with funds you can afford to lose.
Now let's throw inflation into this formula, because history suggests that people on fixed incomes almost always lose. Plus long term inflationary pressures certainly exist. To obtain this 4.5% return on safe investments in today's economic circumstances you have to invest in long term investments and lock that return in for the long term. This means when interest rates rise, the capital value of those investments will fall. If prices rise (as they will if interest rates rise), the purchasing power of these investments will fall as well. So you have to have more than enough capital to have an income that is more than sufficient today to be sufficient in five, ten and fifteen years ahead.
This is why I highly recommend inspired investing which is looking beyond the numbers and turning one's life into a process of earning income for life through some enjoyable process that serves your fellow man. The earnings do not have to be huge if you already have a fair income from your investments. If the activity is fun, then it will not seem to be like work and whatever service you provide, its value will most likely rise with inflation.
This inspired approach to investing helps solidify the worth of your capital and keeps life interesting. When one stops taking on challenges it is easy to get in a rut and a rut is nothing but a grave with the ends kicked out!