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The Case for Normal Returns

From the market lows in 2009, the US stock market has rallied an impressive 320%! (DJIA low of 6,469 to on 03/06/2009 to 27,359 on 07/15/19) After such a long period of strong stock returns, it is natural for investors to ask themselves the question “How long can this continue, and after a strong run do we need to expect much less in the future?” In fact, we have received variations of these questions from many, if not most, of our clients over the past couple years. While we think lower nominal returns are likely over the coming decade, we believe that looking through the lens of “Triple-Net Returns” offers a much more “Rosy” picture of the future. 

The term “Triple-Net Returns” was created by Peter Mladina in the Journal of Wealth Management back in 2017 and is rarely discussed, however put simply it is an investor’s return after the three items: Taxes, Inflation, and Fees. Arguably, it is the best measure of an investor’s true gain or loss from investing.

Before we dive into why we think the return picture for the future has promise, let’s start with our thoughts on “Headline” or nominal returns in the future. While offering little help in the way of short-term timing of the markets, over the long-run we believe stock valuation metrics such as the P/E ratio are very instructive about returns.

Through 06/30, the Earnings Yield of the S&P 500 (Earnings per share / Price per Share) of the S&P 500 is right around 6%. (Yardeni Research) This corresponds to a 16.6X PE Ratio. After adding a conservative 2% for future earnings growth, our expected stock return for the next 10 years is 8%. The S&P 500 averaged a 10% return from 1926-2018 (Investopedia), so without a doubt expected headline returns are lower, but that is where Triple-Net Returns come into play.

Of the three measures to look at, let’s first start with fees, and more specifically, the cost to by or sell a share of stock. According to Deutsche Bank, the average cost for large institutions to buy or sell a share of stock in 1980 was $.25 per share. Today, that rate has dropped to about $.025 per share. A decrease of 90%! If an investor traded their entire portfolio every year (something we don’t recommend!) and all stocks were about $50 a share, that would equate to a .50% drag to returns in 1980 versus only .05% today! This is just one measure of cost, but we feel it reaches an appropriate conclusion.

The second measure we’ll look at is inflation. From 1914 to 2018 The CPI-U (a variation of the Consumer Price Index) averaged 3.13% per year (Federal Reserve Bank of Minneapolis). However, since 2007 the same measure of inflation has ONLY averaged 1.83%. Additionally, history appears poised to continue as Amazon and other technology firms are aggressively competing prices down across industries. Should inflation continue to be lower, this effectively adds around 1.3% to investor returns.

The final measure of Triple-net returns is taxes. This measure is a bit more nuanced. The tax landscape is largely broken into three areas: Corporate taxes, Capital Gains taxes, and Personal Income taxes. The first is an undoubtable positive. Corporate tax rates of 21% are the lowest since 1940. (Trading economics) This allows corporate owners of stocks to keep more of the gains, and further allows them to ultimately distribute a higher percentage of their earnings to shareholders. Capital Gains taxes offer a fairly balanced conclusion as the effective tax rate on capital gains has stayed relatively stable throughout time ( Personal Income taxes are also largely a wash. Data from 1979 through 2016 shows that EFFECTIVE personal income taxes have remained fairly stable throughout time; averaging around 10-11% for the population as a whole and 20-24% for the top 1% of income earners after all deductions (

Combining our expected headline returns with the impact of fees, taxes, and inflation provides us with our output for expected returns relative to history:

As you can see from the above calculation, there is a strong case to be made that stock returns in the future should look very much like the past. In general, the Market is a very skilled weighing machine and in aggregate does a good job at efficiently discounting many factors simultaneously.
However, even with “average” expected returns there will undoubtedly be volatility. Despite earning 10% a year, since World War II the stock market has seen 89 pullbacks of at least 5% with 33 of them being at least 10%, and there is no reason to think that volatility won’t continue.

Volatility is the price investors must pay for long-term returns, and we believe a thoughtfully constructed asset allocation and financial plan puts investors in the best position to weather volatility and capture returns throughout time.

September 2019

*Calculation of ((Nominal Ret. – Trading Fees) * (1-Tax Rate)) – (Inflation) = Triple Net Return

**Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. No strategy assures a profit or protects against loss. Investing involves risk including loss of principal.**
AAHH Team 


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