Code technology became famous in the 1970s when the Mayo Medical
Centre in Minnesota used it to track patient files throughout
This tool for analysing and leveraging cost data, led to significant
savings for the institution. Sometimes I just wish for bar
codes to track individual investments!
Last week, we saw an eight-year bond issue, returning eight
per cent per annum, with distributions half yearly. The question
for us as we track our own little investments is can we do
better than that for ourselves?
The bond issue would have been taken up by mainly large institutional
investors. Many of us will continue to place our savings in
the self- same institutions. If they can capture eight per
cent per annum, how much will we get? Obviously that eight
per cent will not pass down to us.
How can we do better? The thing to remember is the reason
for the Bond issue. It was hoped that the liquidity that was
blamed for inflation would disappear and the inflation rate
will fall. That shows the power of the large institutional
The second thing to recognise is that with the Bond issue
you put away your funds for eight years, if you want the promised
returns of eight per cent per annum.
The power in the hands of the small man is in his environmental
scanning ability. The desire here is to beat the inflation
rate with knowledge. There are other institutions offering
as much as nine per cent return for a similar eight year period.
You need to scour the market for annuity products, and then
compare the value of guaranteed rates, and the opportunity
cost with respect to streams of income.
The bond issue will provide a semi-annual stream of income
like an annuity, which means you have a cash flow and you
can actually use the income from the money you have put aside
in the Bonds, during each year.
If you are going after a higher return than eight per cent,
what will you not get? Typically you may not get the cash
flow stream. This is an opportunity cost. It is the price
you pay for wanting more returns in the end, since you cannot
use any of the money you invest for eight years.
But what will you get, for the sacrifice? Typically your annual
returns (which you cannot get in hand) will compound. The
effect will be to generate a yield after eight years that
is so much larger.
For example! Assume you put aside $50,000 for eight years,
with a promise of nine per cent per annum. If you do not withdraw
the semi-annual returns for an eight-year period, the sum
accumulated at the end of eight years will be close to $100,000.
But you need to remember the risk involved in the quest for
a higher return. The rate may not be guaranteed. It may be
a current rate, or it may an historical rate. Remember past
performance is no guarantee of future performance!
Lets look at an alternative. If you get a guarantee
of say 7.5 per cent for five years. You will still end up
with close to $90,000, after the five years, assuming no withdrawals.
The question is, can you defer gratification and put away
the $50,000 for five or eight years, and defer the stream
of income or annuity?
What Mayo Medical Centre did was implement best practices
in their operations. We have a figure out a way to do the
same in our own financial planning to secure a future steeped