There's lots of ways to figure inflation. Monetary inflation is like pumping up an air bed (or a Space Hopper): if you squmph one end down, another part will swell, and that makes it hard to estimate the effect in any particular sector. So let's go back to the major source of inflation, and assume M4 (bank lending) has increased by an average 10% p.a. - I don't think that's far off.
According to this article (which also predicts even lower returns in future years) the total return on equities over the last 100 years has averaged 10.1%. That'd be nice. Now let's assume dividends averaged 3% - and let's assume you kept it all, instead of what really happens, which is you pay much of it to intermediaries, stockbrokers, fund managers and the taxman. To get the rest of this monetary-inflation-matching total return, we'd have to see 7% p.a. capital growth.
7% compounded for ten years makes 96.7%. So if you had bought the FTSE ten years ago, it would need to be worth around 11,375 today. After taxes, fees and charges. And then it would have to be worth even more, to make up for the fact that you don't keep all of your dividends, either.
Oh.
2 comments:
Now you have totally depressed me.
Sorry, JMB - really. But I think the experience shows us a few things.
First, we have a hurdle rate to beat - about 10% per year total return. If shares don't do it, then your money should be in something else, and if you own a house, it probably was. And if it was, maybe it should now be in something else again.
Secondly, although the only year to invest, in the last 10 years, that returned 7% p.a. plus in the years after it, was 2003, if you take end 1999 as your measuring point, ALL the years from the mid-80s were good. So as the market declines, maybe we're getting back to the re-entry point.
Thirdly, consider the effects of taxes, fees and charges when planning your portfolio.
Lastly, set a benchmark... which brings us back to Doh!
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