Investment performance is often less than it appears. The top-line number may impress, but after adjusting for real-world frictions, the net result may disappoint.
Everyone knows this and, for the most part, everyone ignores it. Maintaining a sunny disposition is essential when it comes to deploying capital, and so who wants to let reality muck up the fun?
Meanwhile, even for those who demand nothing less than the unadulterated truth, it’s unclear how to adjust top-line returns to calculate something closer to reality. Although it’s easy to generalize for everyone, the final numbers may be applicable to no one. So it goes with investing when you move from paper to reality.
That said, in those rare instances when someone takes the time to estimate the damage, the reality burst can be shocking, even if it’s not precisely accurate. One example was dispensed yesterday, deep within the walls of New York’s celebrated 21 Club, where Garrett Thornburg, CEO of Thornburg Investment Management, spoke to a room of journalists (including yours truly) on the hard facts of net results.
Consider the S&P 500, for instance. According to Thornburg, the 11.7% annualized total return for the index over past 20 years through 2006’s close fades considerably after deducting for a variety of monetary abrasions that cut into investors’ take.
Indeed, the annualized 11.7% for the S&P 500 falls to 6.5% after investment management fees, dividend and capital gains taxes and inflation, according to Thornburg. The dynamic is at work in other asset classes too. Again using Thornburg’s numbers, we’re told that annualized total returns over 20 years are smaller than they appear. In particular,
* small cap stocks (as per the Russell 2000) fade to 5.9% from 10.9%
* foreign stocks (MSCI EAFE) drop to 3.5% from 8.4%
* long term government bonds (20 year Treasuries) slip to 2.1% from 8.3%
* commodities end up with a negative 0.9% from a nominal 3.1%.