• 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:

    Experiences in raising children in shared housing

    Sometimes I see posts about people’s hope to raise children in a group housing situation, and it often seems overly optimistic to me. In particular they seem to expect that there will be more shared childcare than I think should be expected. Today I talke…

    via The whole sky October 18, 2021

    What to learn

    It's common to see people advocate for learning skills that they have or using processes that they use. For example, Steve Yegge has a set of blog posts where he recommends reading compiler books and learning about compilers. His reasoning is basicall…

    via Posts on Dan Luu October 18, 2021

    EDT with updating double counts

    I recently got confused thinking about the following case: Calculator bet: I am offered the opportunity to bet on a mathematical statement X to which I initially assign 50% probability (perhaps X = 139926 is a quadratic residue modulo 314159). I have acce…

    via The sideways view October 12, 2021

    more     (via openring)


  • Posts
  • RSS
  • ◂◂RSS
  • Contact