Real Returns Not Evident in Investment Performance Reports

NEW YORK (MainStreet) -- When considering an investment, we're often presented with a nice chart: an ever ascending mountain of performance, stair-stepping its way to major profits. Our quarterly brokerage performance reports are much the same, showing "nominal" returns rather than "real" returns. Or, as one investment management company coins it: real real returns. What performance reports don't account for is the significant erosion of returns by taxes, expenses and inflation, says Thornburg in a new study. And the impact is sizable. It's quite likely you are earning about half of what the performance reports claim -- maybe even less.

The analysis examined the growth of $100 invested in the S&P 500 Index over 30 years -- from December 31, 1983 to December 31, 2013. The result is a mountain chart with sharp crevices, reflecting the market downturns of the Tech Bubble and the Great Recession. But like any good performance chart, it has a happy ending; a final peak showing an 11.09% return. The hypothetical $100 investment had grown to $2,346.

But then the subtraction begins. First expenses are shaved off the top - estimated at a conservative 0.50%. Then dividend taxes, capital gains taxes and inflation. The net result is a real real return of 5.97%, or your $100 has grown to just $570 -- in 30 years. Not bad, but not a mountain of profit; perhaps a modest mesa. And that's not even considering the strong likelihood that you might have bailed on the market during one of the ensuing panic attacks over the course of three decades.

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