Macro Economic Trends and Risks
What is a Safe Rate of Return?

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March 7, 2008

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I've seen a lot posted lately about various strategies for obtaining the highest level of safe rates of return. The ideas have ranged from going to cash, to CDs, to high dividend paying stocks, to that idea refined for those whose dividend has risen for the last 50 years.

I won't venture my opinion on any of these strategies but, instead, will frame the issue in perhaps a slightly different way.

At the beginning of 2008 the US Dollar value, as measured by the dollar index which I will refer to as USD, was trading at about 85. As I write this missive it is trading at 72.59. This means that just since the beginning of the year the value of the USD has declined by 14.6%.

If what you are invested in has not increased by at least 14.6%, you have lost real ground this year. To put a number on just how much you've lost, let us assume that the safe rate of return from any of the above mentioned sources is 5%. I know that is high for some of the strategies and low for maybe one of the others, but for argument's sake, let's just average it out and say your safe money is returning 5%.....per annum.....that means that so far this year that safe money has earned: (31 + 29 + 5)/365 X .05 = .89% So, your safe money has returned less than 1% in an environment where the value of that money has declined by 14.6%!

Framed another will now take you three more years at the safe 5% rate of return to break even in terms of purchasing power to just where it was 2 months ago! And that's not counting the potential for decline that the USD has for the next two months.

I don't know any of you folks well enough to give specific recommendations for your own assets. What I do recommend though is for those who think they are protected by not having market exposure to examine that premise in light of the falling USD.

We don't need to get esoteric here folks. If the value of the USD falls and no-one hears it, it still results in lower real value for USD holders. You don't need confirmation from the Government's inflation numbers to understand deep in your bones that if the value of what you buy stuff with (money) has declined, so has the amount of stuff you can buy (purchasing power).

This is real, and it is especially dangerous for folks using fixed rates of returns to fund fixed income lifestyles. Do yourselves and those who look to you for guidance a real favor and think about this issue very carefully.