• Posts
  • RSS
  • ◂◂RSS
  • Contact

  • What Rate of Return Should You Expect?

    April 6th, 2013
    ea, money
    If you invest money, perhaps because you want to give money in the future, you want a good estimate of the real rate of return so you can compare it to just giving now. Small differences in this estimate have very large effects over decades, and just today I've seen people giving numbers as far apart as 2% and 8%, which over 40 years mean 2.2x growth and 22x growth respectively.

    What is reasonable here? If you look around online at personal finance sites you'll see numbers like 6%, 7%, 10%, 11%, and even 12%. First off, these all ignore inflation, which has averaged about 3%. Naively subtracting, this gives us real rates of 3%, 4%, 7%, and 9%. There's also a lot of cherry-picking: if you're willing to choose specific years and specific indexes you can get quite good numbers.

    There's an even bigger cherry-picking problem, however, in that they're all based on US returns. Other countries have had worse economic performance, or have even had their stock markets wiped out. Dimson, Marsh, and Staunton (2013) (pdf) (summary) conclude that investors should expect much lower returns:

    We have estimated that over the next 20-30 years, global investors, paying low levels of withholding tax and management fees, can expect to earn an annualized real return of no more than 3.5% on an all-equity fund and 2% on a fund split equally between equities and government bonds.
    The difference between 7% interest and 3.5% interest is the difference between 60x and 8x over 60 years. This is really important if you're trying to decide whether you do better to save money now and donate later after several decades of compound interest. [1]


    [1] If you're saving for your own retirement tax incentives are probably more important than interest rates.

    Comment via: google plus, facebook, lesswrong

    Recent posts on blogs I like:

    Crying in museums

    Exhibits that made me want a better world The post Crying in museums appeared first on Otherwise.

    via Otherwise January 6, 2023

    My Rainbow Kit

    For Christmas I got a really fun kit about rainbows. It had a rainbow catcher, a really cool necklace, a streamer thingy, and it also had a really really cool pinwheel, and it also had a bracelet and a pinata. Unfortunately the pinata didn't work out …

    via Anna Wise's Blog Posts January 5, 2023

    Phones

    I think that once a kid is in third grade they should be able to get a phone. I think that while sometimes parents might want kids not to have them at certain ages, phones can be quite useful at times. Tablets don't have GPS, they don't have WiFi…

    via Lily Wise's Blog Posts January 5, 2023

    more     (via openring)


  • Posts
  • RSS
  • ◂◂RSS
  • Contact