Estimation

(Cont’d)

Let’s  consider the example I outlined yesterday: If you have $6 million and it’s put on some fixed-return investment with a yield of 4%, the yearly return would be $240000, or $20000 every month. In theory, your livings could depend on it forever, and, by the time you are summoned by Chairman Mao, there is a decent legacy left for your children.

The only draw back is: Inflation is not put into the equation. If the inflation rate is also 4%, $20000 twenty years later would be equivalent to $9127 now. (Interested visitors can try the computation yourself with a simple scientific calculator. All it needs is basic secondary school arithmetic.)

How can we get around the problem and have a realistic estimation?

Simple. What the above example tried to show is: If your investment return is the same as the inflation rate, you could cross out the two sides of the equation; the investment has zero return (that is, the money is simply put under your pillow), and there is no inflation. If there is a $6 millions of savings and you continue to draw $20000 each month for your living, it is sufficient for 25 years – and no legacy for your children.

You see? What we are getting at is some form of investment is always necessary – not for accumulation or acquisition of wealth, but, really, for getting rid of and guarding your savings against inflation.