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The simplest definition of risk for most investors is that risk is losing a lot, or all, of their money. When it comes to investing in any fixed-interest security or fund, a simple rule is that, the higher the yield the higher the risk.
With interest rates on bank deposits offering such paltry returns, investors have turned elsewhere over the last two decades in a search for income to meet their living needs.
What worked in the past
Investing in high dividend paying shares has worked well in the 2000s and 2010s, but the earnings growth of nearly all of these companies is forecast to be between zero and 1% over coming years. This will most likely mean that dividends received will be offset by a falling share price.
Judging Property Funds
One Wentworth Courier reader I recently met, was very pleased to receive his $54,000 six-monthly income distribution from a listed property fund. What he didn’t realise was that the share price of the property fund fell by more than $61,000 in the three weeks between our two meetings.
It appears that the fund is paying investors their own capital as an income distribution. To me, this is not an smart investment.
Researching Mortgage Funds
I had the pleasure of analysing a small mortgage fund for another prospective client last week. The fund is run by a reputable country law firm, with most of the loans being made to farmers at interest rates between 8% and 12%.
The fund’s Information Memorandum states their fees at just 0.59% per annum but the Financial Accounts of the fund indicated that the income received was 9.28% of the loans made, while the amount paid to investors was just 4.15%. The difference went in fees to the Responsible Entity, who just happened to be an entity owned by the law firm, Management Fees paid to another entity owned by the law firm, and of course legal fees, that were paid directly to the law firm.
The fund was audited by a large Sydney-based firm of accountants and looks all above board, but it just goes to show that the fees stated are not always what you are incurring.
Investors in the fund are paying a 5% fee to receive a 4.15% yield. To me, the reward doesn’t justify the risk.
Draw Down Approach
In my article Securing a 6% to 8% Income Stream (February 3, 2021), I explained how my approach to structuring an income stream was developed from studying famed US investor Warren Buffet, now aged 90.
Buffet famously told shareholders at one annual meeting that they can generate a far higher income stream, than if he paid dividends, by what he calls the “Sell-Off Approach”.
This is almost identical to the Draw Down Approach that I developed in 1994. By using this approach my clients have comfortably drawn an income stream of between 6% and 8% over the last three decades.
The Draw Down Approach solves the dilemma facing retirees in today’s low interest rate environment.
If you are impacted by low interest rates, or taking a risk by using high yielding investments to fund your retirement, please come in and meet with me to discuss how the Draw Down Approach can provide you with the income stream that you need to live a comfortable lifestyle. Your initial discussion with me will be provided without cost or obligation.
Disclaimer: This information is general advice only, & has been prepared without taking into account the objectives, financial situation, or needs of any individual. It is not a specific recommendation to buy, sell or hold any product or security. Readers should seek financial advice before making a decision & should consider the appropriateness of this advice in light of their own objectives, financial situation, &needs.