Golden Opportunities

How much money are your investments really making after fees, taxes, and inflation are accounted for? Here to help us discover our real return is a real expert who we love to see return, the financial quarterback Jim Lineweaver.

Question: What is a "real rate of return"?

Answer: As investors, you can't just look at the interest of dividends paid by your investments. Or the growth of your investments. We also need to be concerned about the impact fees, taxes, and inflation are having on our investments returns. We need to know the real after-fee and after-tax return of return on our investments.
Different investments have different fees and different taxes. For example, you can't forget about commissions paid on stock sales or on annuity purchases. You pay income tax on your interest from CDs but lower capital gain tax when you sell stocks or real estate.
Only by knowing the real after-tax rate of return will we know how we are truly performing, and be able to compare the rates of return on different asset classes.

Question: Is the real rate of return easy to determine?

Answer: Most of the time when we hear the rate of return on a saving or investment vehicle, what is being quoted is the nominal rate of return. This is the rate of return prior to expenses, taxes and inflation.

Question: Can you give us a realistic example?

Answer: If we look at the following chart, we will see that the difference between the nominal rate of return and the real after-fee and tax rate of return is shocking. Growth of a Hypothetical $100.
The chart on your screen shows the hypothetical value of $100 invested in the S&P 500 from December 31, 1976 to December 31, 2006-a thirty-year period. If we look at the nominal returns, that $100 grew to $3, 224, which is an annual rate of return of 12.27%.
However, if we take out fees, [to pay the broker or manager] it drops the net value to $2,776. Now take out taxes on dividends and capital gains, and now the growth of our $100 investment has shrunk to $1,582.
Last but not least, we need to take into the invisible tax we all pay: inflation. Taking inflation into account, our $100 hypothetical investment thirty years ago would have grown to $456, an average annual rate of return of 5.17%. What a big difference from the $3,224 nominal return, 12.27%!
Keep in mind the S&P 500 is an index, and you cannot invest directly in this index, or any other index. These examples are for illustrative purposes only and are not indicative of any investment. Your results will vary.
Now, having a hypothetical investment of $100 grow to $456 in thirty years may not sound like much, but this return outpaces the real after-tax rate of return of other asset classes.

Question: What about the other asset classes?

Answer: The S&P 500 represents investments in large cap stocks. If we look at the real after tax rate of return of other asset classes, we see a similar erosion of the nominal rate of return once fees, taxes and inflation are taken into account.
Small cap stocks, as illustrated by the Russell 2000 index, often considered to outpace large cap stocks over the long run, have trailed large cap stocks over the past twenty years on a real rate of return basis, coming in at 5.9% vs. large cap stocks, the S&P 500, 20-year return of 6.47%.
And it gets worse from here. Long-term government bonds had a real rate of return for the past twenty years of 2.07%. Intermediate government bonds, 5-year treasuries, had a real rate of return of .78%. Treasury bills actually had a negative rate of return of .67%, all according to a study by Ibbotson & Associates.

Question: How about CDs?

Answer: Even though CDs were not one of the assets classes included in the results of the study, by looking at the returns of intermediate government bonds and treasury bills we can conclude that the real after-tax rates of returns on CDs would be considerably less than the quoted or nominal rate of return. CDs are FDIC insured while government bonds are not.

Are your investments real-ly good, or are you real-ly surprised at your real rates of return? Here's a real-ly good idea-call Jim Lineweaver to learn more.