::  Posts  ::  RSS  ::  ◂◂RSS  ::  Contact

What Rate of Return Should You Expect?

April 6th, 2013
giving, money  [html]

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 witholding 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:

High-Speed Rail in Small, Dense Countries

Four years ago I brought up the concept of the small, dense country to argue in favor of full electrification in Israel, Belgium, and the Netherlands. Right now I am going to dredge up this concept again, in the context of intercity trains. In a geographi…

via Pedestrian Observations October 12, 2019

What do executives do, anyway?

An executive with 8,000 indirect reports and 2000 hours of work in a year can afford to spend, at most, 15 minutes per year per person in their reporting hierarchy... even if they work on nothing else. That job seems impossible. How can anyone make any im…

via apenwarr September 29, 2019

Taxing investment income is complicated

How should a state tax investment income if it wants to maximize its citizens’ welfare? This sounds like a simple question but I find it surprisingly hard to think about. Here are some of the positions I’ve moved through over the last few years: Taxing in…

via The sideways view September 22, 2019

more     (via openring)

More Posts:


  ::  Posts  ::  RSS  ::  ◂◂RSS  ::  Contact