Conservative Investors Are Losers
By
William Cate
It isn't your money that counts. It's what that money will buy that matters. To preserve your savings, your money must earn an income that offsets the ravages of inflation. If your interest income is subject to taxation, the interest level must equalize inflation after taxation.
It's 1952. You're a 12-year-old conservative investor planning to retire in 2005. You decide that after you retire, you will want to mail 1,000 postcards over the remainder of your life. You put $10 in a bank savings account, which represents the cost of the 1,000 post cards in 1952. The bank pays you 3% annual interest and after you pay State and Federal Tax on the interest, you are earning 1.8% on your postcard retirement investment. In 1992, your postcard fund has grown to $20. In January 2005, your postcard fund will have $27.50 in it for your retirement postcards. Meanwhile the price of 1,000 postcards has risen to $230. The cost of a postcard will rise again before you die.
If you had a middle class income and retired on a fixed income that equaled your salary in 1993, you are finding it nearly impossible to maintain your lifestyle today. The reason is the cost of everything has nearly doubled since 1993. Today, your fixed income buys about half of what it did in 1993. This pattern of certain poverty for the elderly has existed since the Depression.
What's the current inflation rate? If you ask the US Government, they will tell you that it has hovered around 3%/year for the past decade or more. Their statistical data is called the Consumer Price Index (CPI). Unfortunately, the Government uses statistics that intentionally report a percentage that is far below the real inflation rate for the average family. Most economists and business people double the CPI to get a figure closer to economic reality. Economic Conservatives tend to triple the CPI to suggest the annual US inflation rate to be around 9%. I'm with the majority who believe that the inflation rate for years has hovered around 6%/year.
What's inflation? The simply answer is that it's any increase in the money supply. Governments increase the money supply to buy more than they earn from taxation. The increased currency supply depresses the value of the existing dollars and thus allows Governments to borrow money and repay the loan in devalued dollars that offset the interest on the loan. In essence, the Government borrows money and repays it in dollars that buy less than did the originally loaned dollars.
You can benefit from the Government borrowing tactic by seeking loans that are below the inflation rate. When the thirty-year mortgage rates drop below 6%, refinance your home or other real estate assets. If you buy nonperishable goods that you'll need in the future, you are earning 6%/year tax-free interest on your risk capital. If you have the storage space, this tactic may make sense to you. There are many other self-reliant tactics that are worth considering in your battle to maintain your lifestyle against the Government's Inflation Gremlin.
The alternative to conservative investment isn't speculation. You will lose your risk capital if you gamble it. If you speculate in a startup business, the U.S. Small Business Administration will tell you that your odds of losing your risk capital are about 85%. If you gamble your money on speculative stocks, your odds of losing your money are about 98%. You may beat the speculation odds once or twice, but over time, you will lose your money. Anytime you gamble against the House, over time, the House will always win, because the odds favor the House. It's way Las Vegas Casinos prosper in good times and bad.
You should seek returns over 10% with a risk of capital loss of 6% or less. My advice is always ask how likely you are to lose your risk capital, before you ask about the potential return on your money. I'm aware of two strategies that meet these requirements. Both require pro-active investors. It's like buying nonperishable goods to preserve their risk capital. You have to do something to benefit from the strategies. I'm willing to supply information on these two strategies to any reader who can suggest other investment strategies that beat the Government Inflation Gremlin.
You can contact William Cate at: Beowulfinvestments@Yahoo.com
About the Author
He has been the Managing Director of Beowulf Investments [http://home.earthlink.net/~beowulfinvestments/] since 1981 and is the Executive Director of the Global Village Investment Club [http://home.earthlink.net/~beowulfinvestments/globalvillageinvestmentclubwelcome/]