5 ms·

Do I have any rational expectations to beat inflation by having well diversified index funds?

• lorenzhs 10y ago
  Historically, as a guideline, you'd have made about 7% p.a. on average, well above inflation. The question is whether you can handle the drawdown (can you keep your nerves during a crash?)
  • mxschumacher 10y ago
    then again: beware of averages. Historical PE ratios are quite high (though EV/FCC would be more instructive) - so it is unlikely that the next couple of years will bring 7%. We're living in a world of free money: if central banks change interest rates the party could come to an end.
    • xapata 10y ago
      Not necessarily. If the interest rates are reduced because the economy improved, then the growth could stay similar.
      • stana 10y ago
        Aren't interest rates reduced to stimulate a struggling economy, and increased if economy improving?
        • xapata 10y ago
          Right. If interest rates are increased, that's a sign of a stronger economy and the market might go up in response. On the other hand, traders might decide the Fed is mistaken, the economy is not in fact stronger, and they'll react to the higher interest rates by taking fewer loans and the market will go down. Basically, the change is already priced-in and you shouldn't worry about timing the market. Buy and hold.
      • gragas 10y ago
        Interest rates go up when the economy is improving.
        • xapata 10y ago
          Oops. That's what I meant to say: s/reduce/increase/
• forgetsusername 10y ago
  >Do I have any rational expectations to beat inflation by having well diversified index funds? You should get inflation + some economic growth + risk premium for holding equity.
  • azatris 10y ago
    How confident can I be of this? Why are banks struggling to get even 2% return on their investment if I can just go on and get 7% on average?
    • forgetsusername 10y ago
      >if I can just go on and get 7% on average? I didn't mention any numbers. If economic growth is low, and inflation is non-existent, you will not approach 7%. >Why are banks struggling to get even 2% return on their investment Where do you get that information?
    • lorenzhs 10y ago
      There's no guarantee at all. In a really bad year (2008?) you might get -50% or worse. Then you might get some really nice returns in the years after (or not!). If you average over several decades, historically, the returns have been around 7 or 8 per cent per year, but the standard deviation is enormous. Just look at a long-term chart of e.g. the S&P 500 at https://finance.yahoo.com/chart/%5EGSPC https://finance.yahoo.com/chart/%5EGSPC - click "Max" and "Settings" -> "Logarithmic" (you'll want a logarithmic axis so that equal percent changes are equal distance on the plot). You'll see that on average it went up over the decades, but between June '07 and February '09, it lost over 50%, and tripled since then. I encourage you to read up on this, but someone else with more knowledge should recommend some books.
      • hudibras 10y ago
        All of this is correct, but the standard S&P 500 index doesn't include dividends, so your typical index fund will (should) do 1-4% better each year than the S&P 500. The S&P 500 does have a lesser-known version that includes the total returns: https://www.google.com/finance?q=INDEXSP%3ASP500TR&ei=WWJNWKiPPImv0ASYibfABg https://www.google.com/finance?q=INDEXSP%3ASP500TR&ei=WWJNWK...
• codecamper 10y ago
  bond etfs have been sold off, so they are cheap and yields are up.