What Rate of Return?

This may be a universal question that most investors face. There are many answers and we think that most of them are flawed. Whether it’s the interest rate on certificates of deposits, bonds, annuities or the potential or historical return from the stock market or a mutual fund, the simple answer does not provide an inclusive answer that addresses the real needs of investors.

Conventional wisdom suggests that everyone is different and their needs are different and therefore their rates of return needs are different. We propose that you challenge this conventional wisdom.

We concur that everyone has different wants, needs, and goals in their life planning. We like different things, have different priorities, and may have similar but different goals. What is not different is that all our capital is subject to the same economic systems and environments. Your capital is insensitive to your situation but very sensitive to your economic world, which is the same for everyone.

We therefore contend that there is really a universal rate of return objective for anyone who wants to preserve the purchasing power of accumulated capital, or capital that you are accumulating for a future use such as retirement. If the use of capital is to transcend your lifespan (pass capital to another generation) than our concept is not age based, but it is capital based.

We therefore conclude that there is a universal rate of return objective that anyone who does not have more capital than they absolutely need should consider. That objective is: An after tax rate of return greater than inflation. This is the minimum return on capital that is necessary to preserve the value of your capital and preserve your purchasing power over time. We refer to this as a “real return.”

One must also consider some other factors with regard to managing a portfolio for this return objective:

  1. a portfolio needs to be designed with risk management as one of its primary precepts.

  2. If you have more capital than “you” need you are better able to assume a higher risk level if you choose to do so. This is where the awareness of long term purpose of capital should be considered. Conventional wisdom often considers only age based objectives for capital; we prefer to also consider the longer term purpose of capital as part of the portfolio objective. This can transcend multiple generations but again that is at the discretion of you, the client.

  3. Not all time periods will allow the above objectives to be accomplished. Periods of very high inflation, very high taxation or severe market declines can make this objective difficult to achieve during a specific shorter term time period.

  4. The duration of a person’s retirement can span 20—40 years. Generating an after tax return greater than inflation can greatly influence the quality of one’s standard of living during those retirement years. This is the reason we believe that the focus should be on “retirement management” and not simply on retirement planning. When there is no longer the cash flow of a paycheck to depend on, the proper management of your personal wealth becomes even more critical to maintaining your standard of living.


While the focus on this communication is on an after tax rate of return greater than inflation some additional comments about inflation are warranted. Inflation is defined as a general and progressive increase in prices; "in inflation everything gets more valuable except money." That sounds simple enough but where the concept become complex is when we attempt to define the “inflation rate.” The government reports “official” inflation rates and many economic factors reflect those reports. Annual COLA (cost of living adjustments) such as social security payments are adjusted based upon the official reported inflation numbers.

There are some issues with this concept;

  1. your inflation rate can be wildly different from your neighbor. How much you have to spend on education, healthcare, housing, utilities, and food are just a few of the items that can affect “your” inflation rate. The government one size fits all number can be quite irrelevant to your situation.
  2. The government since 1983 has periodically changed the methodology of how they calculate the number.
  3. There is probably no exact way to calculate a real and accurate number, especially one that is universal to everyone.


This means that while we know the cost of living continues to increase putting an exact number to the amount of increase is probably impossible. That is why our Investment Seasons concept is a significant factor in asset allocation and the portfolio design process. While the level of inflation is important it is more important is to understand the magnitude of change and the direction of change that is taking place in inflation. This defines the different kinds of inflation seasons. This in turn helps us understand how different asset classes offer the different opportunities in the quest for achieving an after tax rate of return greater than inflation.

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