Chapter 5

How to Prosper by Earning 15 Percent in a 1-Percent World

Now that you've decided to get on the right side of compound interest, it becomes obvious that the percent of return on your savings is a really big deal. There is a huge difference down the road in the results for money compounded at 2 percent as opposed to money compounded at 15 percent or 20 percent.

As this is written, too many people assume they can't get more interest than the pittance of less than 1 percent they can get currently at the bank or in a money market fund, but Safely Prosperous or even Really Rich people never surrender to this assumption because they know they don't have to. In fact, your prosperity depends on getting a decent compound return on your money. If you don't get at least 6 percent, your compounding program is aborted. There are always lots of alternatives for decent yields, sometimes as high as 20 percent with acceptable levels of risk. (“The times they are a-changing” so all of the following examples are for-instances, which may not be good choices by the time you read this, but they are a great place to start looking.)

You can start with 10-year Treasury notes, which in late 2003 are yielding 4.25 percent. Long-term T-bonds or T-bond funds are yielding 5 percent or better; however, they are exposed to greater capital risk if interest rates should turn around and head the wrong direction—as I explained in Chapter 3—which will lower the market value of all bonds. The risk is higher with the 30-year treasuries than it is with the 10-year notes, and the 10-year note returns are close enough to make them an acceptable compromise. If you invest through your IRA, there are no current taxes, as taxes are deferred and the interest is exempt from state and local taxes.

What if you want a better yield than Treasury securities offer? As yields go up, risk increases, but there are still reasonable compromises.

One of the best places to look is real-estate funds. Fidelity Mortgage Securities Funds (FMSFX) returned 7.74 percent in 2002, and is probably still in the 6-percent range as this is written. Alpine Realty Income and Growth Funds (AIGYX) has yielded 13.08 percent. The fund invests in big real estate companies, such as malls and La Quinta hotels. Then there is the Security Capital European Real Estate Fund (SEUIX), which yielded 24.02 percent in 2002 and has yielded 21.9 percent to date in 2003.

Next are international bond funds. The average year-to-date yield for mutual funds in this sector is 9.6 percent. Most of the funds are producing double-digit returns year-to-date. Five funds in this sector have yielded between 19.53 percent and 18.76 percent in 2002, and are very close to that in early 2003. There are lots of big-name bond funds and fund families to choose from. You probably ought to throw a few darts at the sector and invest in the holes to diversify.

Then there are long-term government bond funds. As of May 2003, the average yield year-to-date for all funds in this sector is 9.42 percent. The top-yielding eight funds are between 16.08 percent and 14.12 percent, all of them in the American Century Mutual Fund family. Among the big-name funds, Vanguard and T. Rowe Price have good performers here in the double digits. This again is a dartboard, but if the stock market takes off, these funds will crash and burn. I think it is a pretty good bet that won't happen, although there will be market rallies.

There is another choice you should at least look at: Stable value funds are in a category between money market funds and bond funds where there is more yield and lower risk. However, these are new, so they have a very short history.

If you choose a bond fund, look for low duration, which means low sensitivity to rising interest rates—but the trade-off for that is lower yields.

Real estate investment trust (REIT) Funds can give you diversification, but not always high yields, although some individual REITs have high yields, including Equity Office (EOPRG), Simon Property Group (SPGGRF), and Liberty Property Trust (LRY).

There are also some very interesting high-yielding preferred stocks you can look up at www.forbes.com.

You can also invest in first or second mortgages, safely secured by real estate. Most mortgage brokers will have some suggestions with yields above 6 percent. I will also monitor some of these opportunities in The Ruff Times.

There are really intriguing opportunities to get some unorthodox high yields, such as real estate tax liens from county tax assessors or written-off loans from lenders. These usually yield more than 15 percent and are often secured by the property. I consider them virtually riskless, but they do have some limitations.

As I am finishing my last edits for the publisher, I haven't completed my research, so you can get a current list on a one-time basis by calling The Ruff Times office at 1-801-224-3660 or e-mailing us at [email protected]. These opportunities are extremely interesting.

Even 20 percent yields will not make you Really Rich, as described in Book II, but they can accelerate your drive toward prosperity and cut years off your program. They are also great places for the Really Rich to put their money once they have made it.

That's what I've dug out so far in late 2003. There are always similar possibilities, and you don't have to be a Sherlock Holmes to find them. Many are listed every day in The Wall Street Journal. All such choices need fairly close monitoring; they are not sock-it-away-and-forget-it investments. In this market where rapid reverses are possible, you have to stay right on top of things either with your broker or on your PC.

The bottom line is that only fools will settle for near-zero yields when they don't have to. It just takes a little homework that anyone can do. I also monitor the yields in the “Investing for Income Portfolio” section of The Ruff Times every month.