The Motley Fool Discussion Boards

Previous Page

Investing/Strategies / Bonds & Fixed Income Investments


Subject:  Real Returns Date:  2/6/2006  1:19 PM
Author:  WendyBG Number:  15241 of 36218

(Cross-posted from Mish Board, due to fixed-income data at the end.)

For Long-Term Investing Plan,
Measure Real-World Return

February 6, 2006; Page C1

...In that real world, inflation, taxes and trading costs bite huge chunks out of the indexes' real returns, making them far lower than they seem.

If you had invested one dollar in the S&P 500 back at the start of 1926, for example, you would have had $2,655.73 at the end of December 2005 -- a very nice gain. But after removing the effects of inflation, taxes and trading expenses, that $2,655.73 would be worth just $46.59...


If you adjust for inflation (not even considering taxes and fees), the Dow would have to rise to 13723 to reach the real current value of its 2000 high...

anyone who held funds in a money-market account in recent years lost money in real terms, because inflation often has been higher than money-market interest rates. The attraction of money-market funds, of course, is that the principal hasn't fallen, as it can if you own a stock.

All this isn't to say that stocks are a bad investment, relatively speaking. In fact, controlling for inflation, taxes and expenses shows even more clearly that stocks over the long term tend to rise faster than other investments, including real estate.


Studies show that most mutual-fund managers fail over the long term to beat the indexes. Their shortfall, in fact, tends to resemble their expense levels. -- End of article

Stocks' real growth rate over 80 years is 4.94%.

The 50-year mean of the real rate of the 90-day T-Bill is 1.36%. The 50-year mean of the real rate of the long-term T-Bond is 2.39%.

The 50-year mean of the real rate of the 90-day T-Bill has recently reverted to its 50-year mean, after about 5 years of below-average real yield. It is almost exactly the same as the real rate of the long-term T-Bond, as we all know, from the flatness of the yield curve. In the past, this has generally been quickly followed by a cut in short-term interest rates.

This compares to a current yield of not quite 2%, for 5-year TIPS. The implied rate of inflation, for 5-year TIPS, is 2.53%.

The ratio of real yield, (80-year) stocks/ (current) TIPS, is currently about 2.5.

There are no fees or commissions for buying TIPS, from Treasury Direct or Fidelity, at auction time. You would have to adjust your actual results for your own stock trading costs.

What will future stock growth rates be? What will future inflation rates be? What will the real rates of bonds be? What is your tolerance for risk?

Your answer to these questions will help determine which investments are right for you.


Copyright 1996-2018 trademark and the "Fool" logo is a trademark of The Motley Fool, Inc. Contact Us