My young boys ask a lot of questions.
I know this isn't unique. Almost all young children ask questions. And after a while, almost all those questions become extremely repetitive and, in all honesty, annoying.
But I'm sure I'm not the only parent who has faced a long stream of "why" questions, which is currently among the favorite questions of my little guys. I patiently answer their questions as many times as they ask because I have found myself in their situation at times. We all have.
After all, "Why?" could be among the most important question we ask as investors.
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This week, I want to run through a few "why" questions with you... because I'm sure many of us have found ourselves asking them at one point or another. (But I promise I will stop before you get annoyed!)
First up: "Why are interest rates so low?"
Obviously, this is a complex question and I will not delve into the economic theory of interest rates or growth. I will just note that rates are low partly because central banks have forced rates down to 5,000-year lows.
Investors in the United States face low rates. Elsewhere in the world, investors face negative rates. According to Barron's...
"As of last week, nearly $9 trillion of global debt securities had negative yields, half again as much as late last year, according to Bloomberg data charted by Deutsche Bank."
Negative rates were considered theoretically impossible as recently as a decade ago. This means borrowers are being paid to borrow. These low rates are largely a result of the European Central Bank and the Bank of Japan buying trillions of dollars of assets to force interest rates down.
Lower interest rates should stimulate spending by making it less expensive for businesses to borrow for expansion projects. But that theory has failed, and the economy continues to grow slowly. As long as the economy grows slowly, rates are likely to remain low.
The Federal Reserve has looked at this question and concluded that rates are likely to stay low.
Fed economists note that investors are accepting low or even negative rates because they value the safety of government securities. This is just one reason rates will remain low. The economists also believe rates will remain low because economic growth is likely to remain low. That's due to demographic trends and the expected below average gains in productivity.
Finally, that brings me to the question of "Why do we need to use alternative income strategies to earn more income?"
This one is simple. We need to be willing to try alternative income strategies because the income available from traditional strategies just isn't going to cut it. A 10-year treasury, for example, offers a yield of about 2.6%. That comes out to about $217 of income a month on a $100,000 investment.
Let's say you're about to collect Social Security, but you estimate that you'll need an additional $45,000 a year in income to maintain a comfortable standard of living in your golden years. That means, with a $250,000 portfolio, you'd need to generate around 18% annual returns just to pay yourself without losing any capital. With a $500,000 portfolio, you'd need about 9%.
Well, I hate to bring it up, but the long-term average return of the stock market is in the neighborhood of 7%, so good luck with that.
If you have millions of dollars, you might be able to obtain sufficient income with yields like this. But most of us can't generate a meaningful income from traditional income strategies, so we need alternative strategies -- like the strategy we use in my premium newsletter, Maximum Income.
How We're Earning Extra Income
There are many more "why" questions that could be asked about each of these factors. But the bottom line is that interest rates are unlikely to move higher for at least a few years.
And that means that ordinary investors like us will require alternative strategies to generate income. Over at Maximum Income, that means we're using what we like to call "bonus" dividends -- that is, extra income on top of the dividends we're already earning from the stocks we already own.
It's pretty simple, actually, and it can work for you, too. As soon as I figured this out a few years ago, I started pulling cash out of my account. First I collected $1,590... then $1,600... and next $1,050. Now other people are doing it too...
If you'd like to learn more, then I invite you to check out this report. It explains how "bonus dividends" work, and details just how powerful they can be for you -- whether you're looking to boost your yields or looking for additional income in retirement.