The secret to true wealth

OK. I have bad news.

I hate to be the one to break it to you, but there has never been a worse time to be an income-seeker. Generating a decent income from your investments – the kind you can live off – has never been harder.

And it’s getting worse. I’ll come back to that statement in a second.

Let’s start with interest rates. They’re the driving force behind lots of what we’re seeing. When they fall, the yield on almost every other investment nosedives with them.

Since the financial crash, interest rates have been at record lows. Under 1% mostly. We have data on interest rates going back to 3000 BC, and these are the lowest rates anywhere in history, for 5,000 years.

And interest rates don’t impact people equally. They discriminate. They’re unequal.

They’re great if you’re in debt (you’re a government). Or you want to be (speculators, companies buying back shares, etc).

But they’re terrible if you want to generate income. For instance, if you’re retired and want to turn your capital into an income you can spend and enjoy.

In that sense, low rates are the enemy of real wealth. They might inflate asset prices. But who wants to sell their assets to fund their retirement? I don’t. I want to use those assets to generate income. That’s real wealth. Real freedom.

And that’s the secret. True wealth isn’t about how valuable your assets are – it’s about how much free income you have to spend and enjoy.

As I said: that’s getting harder and harder. With interest rates so low, bonds, annuities and bank accounts, the traditional favourites of income investors, have offered less and less.

In fact, over 30% of all bonds currently trading in the world offer negative interest rates. That figure has now climbed over $16 trillion. So instead of getting interest on your savings, you are actually paying someone to hold your money for you.

A good proxy for this is the yield offered by ten-year US Treasuries (bonds issued by the government), which has gone down steadily over the last few decades. This has made income investing more difficult, as investors couldn’t just invest in safe US government bonds and get a 5-10% return any more. (The same thing is true here in Britain.)

Just look at the yield on ten-year US government bonds (US ten-year Treasuries) in the last decade:

The point is made even more starkly when you take a longer term view, looking at the same US ten-year Treasury yield over the last couple of centuries:

This is bad news. For savers. For investors. For anyone seeking an income.

Annuities, which can be bought and produce income have also been hit.

Billy Burrows of Better Retirement, a financial adviser, said: “Ten years ago the benchmark annuity, bought with £100,000, would have paid more than £6,000 a year before tax. Today, the same annuity would only pay a little more than £4,000 a year.”

In 2019, annuity rates have continued falling, and are now at their lowest since 2016. Just take a look at the chart below.

With interest rates falling, and annuities and bonds being related to the central banks’ base rates, these forms of income have been fading.

So the traditional forms of generating income from investments have been struggling.

Am I right? I’m keen to hear your stories on this front. How have low rates hit your ability to generate income? I’m all ears on Maybe you’ve solved the problem already…

By the way, this problem isn’t going to get better anytime soon. In fact, with rates falling again it’s going to get worse.

Case in point: news yesterday the government is slashing the yield on some of its state-run bond schemes. The Telegraph had the story:

The state-backed lender today announced it was ending sales of its one-and three-year Guaranteed Growth Bonds and Guaranteed Income Bonds with immediate effect. There are 727,000 Growth bond customers, with £16.9bn invested, and 49,000 Income bond holders, with £3.4bn of the deals.

At the same time, it is cutting the rates for existing customers, blaming “exceptionally low” gilt yields. NS&I said the changes would bring it into line with other deals on the market and would “help maintain the stability of the broader financial services sector”.

Expect news like that to continue.

And expect to hear about increasing numbers of desperate investors heading into the corporate junk bond market. This is exactly what it sounds like. Junk bonds pay a higher yield. That’s because they’re riskier. And low rates are pushing – forcing – investors to take on those extra risks.

That’s never a good sign. Especially since a decent chunk of people won’t truly understand the risks they’re taking.

The last time we saw this… it didn’t end well.

Junk and near-junk corporate bonds are at even higher levels now than in 2008. Investors tolerated the additional risk as a necessary price for that elusive prize: income. This is higher risk, as high yields on corporate bonds correlate to higher risk of default. In the next recession if (and when) we get a wave of company failures… that extra risk may turn out to have not been worth it.

So what do you do?

Well the first thing I recommend is: acknowledge there’s a problem. A big problem.

Second: acknowledge that no one is going to solve this for you. The market isn’t suddenly going to start throwing out big income just because you want or need it.

You have to take steps to solve the problem. The operative word in that sentence being you.

There are things you can do to generate more income. But you need to take positive steps.

That’s why next week we’re hosting our first ever Boost Your Income Masterclass. It’s free. And in it, I’ll be showcasing a simple technique you can use to boost your investment income. I’ve recruited two City money managers who use this secret every day in the markets, trading millions of pounds’ worth of assets.

Now they’re going to show you how it works.

If you want to earn a decent income from your investments, do not miss this special event.

You can sign up free of charge right here.

All best,

Nick O’Connor
Publisher, Exponential Investor

Category: Commodities

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