Pragmatic Capitalism

Practical Views on Money, Finance & Life

Understanding Your Real, Real Returns

Thornburg Funds has a new report out on understanding your real, real returns and it’s fantastic.  I discuss this topic in detail in my book, but they do a much better job covering this than I do.  So go have a read.

The chart below is super important.  Most people who get into investing think only of their nominal returns.  That’s the top line figure.  But what really matters to you is the bottom line.  And in the investment world that’s the real, real return you get.  That’s the after tax, after inflation, after fee return.  It’s the money that actually goes into your pocket relative to your purchasing power.


The interesting part of this discussion is that the mainstream media almost never focuses on this concept.  So we’re constantly fed this myth of generating 10-12% annualized returns in the stock market or generating high returns on housing.  The problem is, the stock market’s real, real return is only 5.97% over the last 30 years.  And single family real estate comes in at a pathetic 0.8%.  In other words, the return that actually goes into your pocket from these assets is substantially lower than most people think.  And that’s because most people don’t calculate their real, real returns.  They don’t properly consider adverse fee effects, adverse tax effects or the problem of purchasing power loss.

You can see the full details in the chart below.  Over the last 30 years every asset class has generated a far lower return than is generally touted.  Commodities are actually negative, as is cash while stocks and bonds are in the low to mid single digits:


We have to be realistic when we get involved in the process of portfolio construction and asset allocation.  Setting realistic goals is one of the most important things you can do because it will benchmark the way you manage your process over time.  Understanding your real, real returns is central to this.

NB – See part 2 on the importance of understanding fees


Cullen Roche

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC.Orcam is a financial services firm offering low fee asset management, private advisory, institutional consulting and educational services.Cullen is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
Cullen Roche

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