The Triple Net Return

Since 1926 U.S. stocks have earned an average of 9.8% (Ibbotson). But what about inflation, expenses and taxes? Jason Zweig (a writer for The Wall Street Journal) calls this the net, net, net return. A recent survey of leading financial advisors found that they projected this long term future rate to be 6% on average.

In order for this to happen, Zweig points out that these advisors will have to deliver returns of 11-13% a year before costs. How likely is this? It’s not.

I am not sure how these advisors think the market will return more than the historical average return of 9.8%. There is a widely-shared view that equity returns are likely to be lower over the next few decades than they have been historically. The arguments for this include the expectation that millions of Boomers will shift from accumulation (buying equities) to distribution (selling equities) as they enter retirement. If there are fewer buyers for stocks, their prices will fall.

Let’s assume that the stock market does deliver 10%. A typical portfolio for a retired investor would be equally allocated to stocks (50%) and bonds (50%). If we assume that bonds earn 4%, then a weighted return would be 7%.

Let’s assume that inflation runs at 4%, expenses are 1%, and taxes are 30%. Depending on our method of calculation, our Triple Net return has become approximately 0%-2%.

This should be a wake-up call for investors approaching retirement.