Thornburg Investment Management recently released an annual report analyzing real returns. It is always interesting reading. Thornburg reviews returns for several types of investments and then subtracts expenses, taxes and inflation to determine which investments allow investors to keep the most return.
For example, if you invested $100 in the S&P 500 Index on December 31, 1979 and held it over 30 years to Dec. 31, 2009, the nominal return would have been 11.24% per year. This increased your $100 investment to $2,440. However, after subtracting taxes paid on dividends and capital gains and adjusting for inflation, the real return was 5.21% per year, turning $100 into $459.
So, how does this compare to other investment options? Over the 30-year period, the S&P 500 (representing large U.S. companies) provided the highest real return. The runner-up was U.S. small companies (4.81% average annual real return) and international stocks (4.55% real return). Municipal bonds, which are in most cases not taxed, outpaced other fixed income assets over this 30-year period.
Some other interesting points:
- Over the 5, 10, 15 and 20-year periods ending Dec. 31, 2009, municipal bonds were the real return leader.
- The 10-year real return of the large-cap S&P 500 Index was -4.21%, the worst of any asset category measured over 10 years.
- Single-family homes are not a good investment. Over 30 years, their real return averaged 0.36%. Over the five years ending Dec. 31, 2009, they had a -4.19% real return.
- Commodities have become a popular addition to globally balanced portfolios. There is expectation that commodities of all types including energy, agricultural and livestock will grow in demand as the world population grows. But historically, commodities have not added anything to wealth creation. The 30-year real return was -3.50 – 20 years (-1.84%), 15 years (-0.82%), 10 years (0.51%) and 5 years (-3.85%). The benefit of commodities comes in risk reduction. Since their returns do not typically move in the same direction as stocks and bonds, they can help reduce overall fluctuation in the balance of a diversified portfolio.
- U.S. Treasury bills, often the preferred “risk-free” investment, are actually plenty risky. They exhibited negative real returns in each time period measured.
For a copy of the full report, including how these return patterns impact the sustainability of portfolios and income in retirement, please contact us at info@bhjadvisors.com or 253-534-8888.
~ Brooks, Hughes & Jones, Partners in Wealth Management — Gary Brooks, CFP®, Allyn Hughes, CFP®, CLU, ChFC, Nancy Jones, CFP®
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