The Real Returns
- Russell’s Investment Manager’s Outlook Survey
- Natural Gas Prices
- Comparing Coke and Pepsi Stocks
- Carnival of Investing - Week 5
- Next Week's Carnival of Investing
- Carnival of Personal Finance - Week 29
- 5 screening criteria for mutual funds
- S&P 500 Dividends
- 20 Largest Mutual Funds
- S&P 500 Earnings Estimates For 2006
- Equity Income Funds
- Focus Funds
- Money Market Funds
- Notable and Quotable
- Mutual Fund Screening Criteria
- Cost of owning a car
Tax, Inflation and Stock Market Returns
Taxes take a good bite out of the investment returns when added into the total return equation. Let’s consider the largest index fund returns for the last 10 years to make a point.
The vanguard 500 index fund (Symbol: VFINX) is the largest index fund and it is also extremely tax efficient. The 10 year before tax annualized return is 9% currently. Vanguard reports that the returns after taxes on distributions was 8.44% annualized for the last 10 years. And here comes the kicker, returns after taxes on distributions and sale of fund shares was 7.67% annualized for the last 10 years.
Now, I am going to add inflation to the equation. I would like to use 4% annual inflation rate instead of the government reported 3% rate because there is a widespread belief in the sane investment community that the real inflation is close to 4%, if not higher.
Subtract 4% from the 7.67% and you are left with 3.67% real return from your index fund investment. Even if you use the government reported data and subtract only 3% for inflation, the real return stands at 4.67%.
Most of the money invested today does not go to the index funds. Actively managed funds are in business and collectively tend to lag the market by 2%. Those funds leave investors with zero to close to zero gain when Uncle Sam collects and inflation takes its toll.
posted by Me, on Sunday, March 05, 2006 at
3:23 PM
4 Comments:
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Precisely the reason that most people suggest that money invested in an SP500 index fund allows you to take 4% out per year, while still conserving its original value -- after taxes and inflation.
If you want 4,000 a year out of an SP500 based account, you need to put $100,000 on it.
If you want an income of $40,000 a year (will adjust for inflation, don't worry), you need a $1,000,000 of today's money.
That is also why most people want a million. You can live on a million -- as the average american family lives on a $40,000 a year income.
Money And Investing -
4 percent real returns is not bad. A lot of people think the market will return less than that in the future. Only time will tell.
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Retail investors like ourselves cannot hear this message enough!
Now, additionally take into account investment expenses. Consider Thornburg Investments' article entitled, Study of Real Real Returns, at http://www.thornburginvestments.com/research/articles/real_real_0705.asp.
How serious should we take investment expenses? Consider Warren Buffett's parable on frictional costs in his latest letter to Berkshire shareholders? An excerpt can be found at http://www.incometrap.com/forum/viewtopic.php?t=739
Generating replacement income from one's assets is no walk in the park The Thornburg article, for example, clearly suggests how important early and/or large regular investments are. -
How does a fund make 9% and be a low-tax investment. U.S. debt pays no where near 9%. Also I think a lot of people really want to be richer, not just keep up with inflation. Income per capita usually grows around 2.5 to 3% higher than inflation. So if you want to stay as rich as the next guy to need to grow your net worth about 6% a year.
By
air compressors, at
12:34 AM
