This week, Mother Nature occupied Wall Street. CNN, the Weather Channel and the National Weather Service reported that the floor of the New York Stock Exchange was under three feet of water. A live video feed of the trading floor said otherwise. Maybe it was just wishful thinking. The stock market was closed anyway.
Next week, politics will keep Wall Street occupied. Several American elections are scheduled for Tuesday. The finance pundits are already debating what the two possible presidential outcomes might mean for the markets.
It’s funny how people can predict what will happen when they’re given two alternative election scenarios, but not what will happen when there’s no election.
The Greeks are set to get another reprieve from their occupiers, the Troika (IMF, ECB, and EU). The German media is reporting that another debt cancellation is in the works, with European taxpayers sharing in the pain this time around. The German politicians who said this wouldn’t happen are now saying it was always inevitable.
We spent last Tuesday evening occupying an apron. That’s the wrong end of a flying trapeze net. Our timing was off and so we slipped out of a catch. The apron is the vertical net that stops you from sliding off the end of the horizontal net. After slamming into it, we can confirm it is fully functional, unlike our nose and knees.
The Real Occupation
But none of these occupations are the one we’re going to tell you about today. In fact, they needn’t matter much to your life, unless you find them entertaining. Your daily life shouldn’t be determined by who gets elected, how high stock prices are, or whether the Greek government gets a bailout.
The occupation we’re referring to, which you do need to worry about, is…your occupation. Not what you do for a living, but whether you should give it up. In other words, how to prepare for retirement.
Retirement is the reason why most Australians invest. They’re building up assets to sell when they give up work. But that’s the wrong model to begin with. If you don’t know what your investments are going to be worth during your retirement, how on earth can you rely on selling them to pay for your expenses?
Imagine if you retired in 2007. You could have burned through your stock market savings at a horrifying rate by selling when share prices were low. Once they recover, you’ll have too few shares left to benefit.
There are two ways to get around this.
Stable, Safer Assets in Retirement
Some assets are valued for their long term price stability. You can rely on them to pay out a predictable amount at a predictable time. Of course, nothing is completely safe. And the returns on these safer assets tend to be lower.
But the benefit of some level of certainty is worth it because that is what you need in retirement. It goes back to the implications of Hubble Market Theory. Your time horizon should determine what kind of assets you invest in.
Now it’s important to have some exposure to safer assets. In 2008 and 2009, you could have sold your safer assets, which didn’t tumble in price, while your riskier assets recovered. But investing solely in safe assets that you sell still has a big downside. It’s a completely defeatist position to take.
If you invest with the intention of selling your assets in retirement, you’re probably being responsible. You’re doing better than the vast majority of people. But you can do much better still. All it takes is a different mindset.
Retirement Income (not Capital Gains)
Imagine a retirement wealth strategy that doesn’t involve having to sell anything. You get to keep what you invested in. You won’t run out of things to sell. You might even grow your wealth during your retirement. All by doing nothing more than monitoring your progress.
The key is owning assets that pay you income. Income that is regular, predictable, grows and can withstand tough times. You invest for the income the asset provides, not the price you can sell it for.
This is the secret of the landed gentry of England, the factory owners of the industrial revolution, and the railroad tycoons of America. They owned income generating assets…and didn’t sell them unless they made a mistake (usually involving debt and gambling) which forced them to sell.
If you don’t believe this is a viable strategy, consider what the world’s first billionaire, John D. Rockefeller, said about the income he generated from his assets: ‘Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.’
But you know what? You probably aren’t Rockefeller or Buffett. You’re probably more like Mr Moraitis than those two. So if you think that owning income generating assets isn’t the key to real wealth, we’d like to direct you to Mr Moraitis’ story. We’ll leave it to the master, Bill Bonner, to explain in this article just how Mr Moraitis’ income producing assets support his retirement.
This may be our favourite Markets and Money yet, so if you’ve already read it, read it again. And try to identify the income producing assets the residents of Ikaria own, which keep them alive and comfortable in the face of economic devastation…
Until next week,
Markets and Money Weekend Edition
From the Archives…
Investment Horizons – Introducing the Hubble Market Theory
26-10-2012 – Nick Hubble
The Big Fall in the Stock Market is Still to Come
25-10-2012 – Murray Dawes
A Safer Than Super Investment?
24-10-2012 – Nick Hubble
The Lost Generation in the US Economy
23-10-2012 – Bill Bonner
NAB and Australian Banking is Oversized and Under Pressure
22-10-2012 – Dan Denning