How Quickly Your Returns Disappear

Is earn­ing 10% a lot? Heck, yeah! But… what is the 10% refer­ring to? Is that your actu­al return, or is that your return before fees, tax­es, and infla­tion?

I enjoyed this arti­cle from today’s NY Times busi­ness sec­tion about how one firm (Evercore) is telling the truth on real invest­ing return, and try­ing to com­mu­ni­cate dif­fer­ent­ly.

In truth, Evercore’s clients are pret­ty wealthy. But, I find it inter­est­ing at how dis­mis­sive they are when they talk about a real return of 3–5% and peo­ple can sum­mar­i­ly dis­miss them. The last para­graph in the arti­cle caught my atten­tion as it sums up the effect of infla­tion, fees and tax­es quite nice­ly, turn­ing a great dou­ble-dig­it return into a mediocre sin­gle-dig­it return in a heart­beat.

It’s not just a “rich per­son prob­lem” either. Fees real­ly mat­ter, and mat­ter more-so when invest­ing over a longer peri­od of time (just like our div­i­dends have an increas­ing impact over time).

It’s very impor­tant to focus on a real return, or in the case of the Elephant’s Paycheck Blueprint, the size of the pay­check you receive by stick­ing to this invest­ing blue­print for the long haul.