When we talk about investment returns, we generally refer to the gain or loss on an investment over a specific period of time. However, to achieve a true understanding of them, we actually have to look at these returns net of inflation in order to understand the impact they have on your real wealth.

 

By doing so, it becomes even clearer that stocks have returned much more than you may think compared to other asset classes like bonds and residential real estate. Please let me show you a few examples.

This chart shows the returns of the S&P 500, treasury bills, 10 year government bonds and residential real estate since 1928. 

As you can see, stocks have outperformed treasury bills by about 3.5 times and 10-year government bonds and residential real estate by about 2.4 times over the past 96 years. Most of us already knew that stocks outperform over the long-term. 

But now, this may surprise you. Let’s look at the real returns next, net of inflation instead. Inflation has averaged about 3.1% per year since 1928.

You can see that stocks have now outperformed by almost 5 times compared to U.S. 10-year bonds and residential real estate, and by almost 39 times against treasury bills!

Most of us would have been able to build a lot more wealth by keeping most of our long-term investments in stock and earning almost 5 times as much net of inflation as any investments in bonds or real estate. Please keep this in mind as you are considering your own investment allocation and how to best achieve the returns you may need to reach your goals.

The last 4 years have been a prime example of this where cumulative inflation has been more than 20%. Those who kept their long-term investments in bonds or cash have not been able to keep up during that time while investors in the S&P 500 stock index and most of the other broad stock indexes have continued to grow their real wealth.

Thank you and we look forward to talking with you again soon.

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