Brenda Vingiello, Sand Hill’s Chief Investment Officer, joined Squawk Box to discuss her thoughts on the latest market trends and market outlook for 2025. This
The Importance of Real Return in a Low Return World
Published Date : July 21, 2016
A growing topic of conversation amongst many investors is how to properly think about their investment performance within context of the current environment of historically low interest rates and persistently low inflation. To answer that question, it is helpful to look back at the last forty years of history and incorporate that period’s steady decline of inflation and interest rates into an assessment of today’s investment outcomes. A closer look at the so-called real rate of return is necessary to ensure a meaningful comparison can be made between past and present performance.
The historical performance of a portfolio’s nominal return alone does not give a clear indication of how performance measures up in any particular financial environment. A practical way to compare performance over a given time period is to adjust the investment return downward by the inflation rate, typically measured by the consumer price index (CPI), over the same period. Historically, CPI averaged 7.10% per year through the 1970s, 5.60% through the 1980s, 3.00% through the 1990s and 2.50% through the first decade of 2000. From 2010 to the present, the trend continued with the index falling to an average of just 1.60%* per year. It is important to remember that what matters most to us all is not solely how well our investments performed in an absolute sense, but how well our investments have performed after inflation, or the portfolio’s real return. To illustrate real return, imagine a diversified portfolio that averaged an annual total return of 8%, net of fees, over the decade of the 1980s. After deducting inflation of 5.6% (CPI), the average annual real return would equate to 2.40% over that time period. Imagine the same diversified portfolio averaged an annual total return of only 4.90% from 2000 to 2010. It would have also earned a real return of 2.40% annually (4.90% less 2.50% CPI).
For many present day retirees, their investing history began in a period of higher yielding fixed income vehicles. Not to be overlooked, however, is that higher interest rates or inflation during that time period eroded a sizable portion of the nominal return. While returns may appear more muted today when judged against higher nominal returns of the past, it is important to remember that current returns must be compared against today’s strikingly lower rates of inflation. Investors who incorrectly fixate on nominal returns, and find today’s low yield environment challenging, must avoid the temptation to deviate from their long-term investment plan. Over time, the interest rate and inflation environment will normalize and nominal returns will rise again. In the meantime, reaching for yield in riskier or non-traditional investments in an attempt to replicate past nominal returns is a strategy we would not endorse.
As the global economy continues to expand, it is likely that inflation and interest rates will rise as well. Over time, investment returns will normalize accordingly. In the meantime, one way to keep current investment returns in perspective is to consider your returns relative to inflation and recognize that your overall purchasing power continues to expand, even though the total return environment over the last year or two is more subdued.
* Consumer Price Index results – All Urban Consumers, Bloomberg
Articles and Commentary
Information provided in written articles are for informational purposes only and should not be considered investment advice. There is a risk of loss from investments in securities, including the risk of loss of principal. The information contained herein reflects Sand Hill Global Advisors' (“SHGA”) views as of the date of publication. Such views are subject to change at any time without notice due to changes in market or economic conditions and may not necessarily come to pass. SHGA does not provide tax or legal advice. To the extent that any material herein concerns tax or legal matters, such information is not intended to be solely relied upon nor used for the purpose of making tax and/or legal decisions without first seeking independent advice from a tax and/or legal professional. SHGA has obtained the information provided herein from various third party sources believed to be reliable but such information is not guaranteed. Certain links in this site connect to other websites maintained by third parties over whom SHGA has no control. SHGA makes no representations as to the accuracy or any other aspect of information contained in other Web Sites. Any forward looking statements or forecasts are based on assumptions and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. SHGA is not responsible for the consequences of any decisions or actions taken as a result of information provided in this presentation and does not warrant or guarantee the accuracy or completeness of this information. No part of this material may be (i) copied, photocopied, or duplicated in any form, by any means, or (ii) redistributed without the prior written consent of SHGA.
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All video presentations discuss certain investment products and/or securities and are being provided for informational purposes only, and should not be considered, and is not, investment, financial planning, tax or legal advice; nor is it a recommendation to buy or sell any securities. Investing in securities involves varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular client’s financial situation or risk tolerance. Past performance is not a guarantee of future returns. Individual performance results will vary. The opinions expressed in the video reflect Sand Hill Global Advisor’s (“SHGA”) or Brenda Vingiello’s (as applicable) views as of the date of the video. Such views are subject to change at any point without notice. Any comments, opinions, or recommendations made by any host or other guest not affiliated with SHGA in this video do not necessarily reflect the views of SHGA, and non-SHGA persons appearing in this video do not fall under the supervisory purview of SHGA. You should not treat any opinion expressed by SHGA or Ms. Vingiello as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of general opinion. Nothing presented herein is or is intended to constitute investment advice, and no investment decision should be made based solely on any information provided on this video. There is a risk of loss from an investment in securities, including the risk of loss of principal. Neither SHGA nor Ms. Vingiello guarantees any specific outcome or profit. Any forward-looking statements or forecasts contained in the video are based on assumptions and actual results may vary from any such statements or forecasts. SHGA or one of its employees may have a position in the securities discussed and may purchase or sell such securities from time to time. Some of the information in this video has been obtained from third party sources. While SHGA believes such third-party information is reliable, SHGA does not guarantee its accuracy, timeliness or completeness. SHGA encourages you to consult with a professional financial advisor prior to making any investment decision.
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