Inflation-Adjusted Returns Always Suck

It isn’t much fun to talk about. It’s kind of a party killer. The music sounds good, the people are jiving, but then you remember you’re still in middle school, a censored Nelly album is playing, and your parents are outside waiting to pick you up.

Inflation is that. No one wants to talk about those moments. They’d rather tell you about the crazy times they had in college.

What can 1 US Dollar buy you today?

What could 1 US Dollar buy you 30 years ago?

The difference between those two questions, in its simplest form, is inflation. So let’s quickly go over some numbers to see how inflation is the worst party in town and awfully humbling. But first, let’s look at the numbers *before* inflation.

– On a nominal basis, the S&P 500 is up roughly 330% since the absolute depths of the Financial Crisis.

– It’s up about 105% since the highs right before the Financial Crisis in 2007.

– It’s up 110% since the highs of the Dotcom Bubble, before it crashed, back in 1999/2000.

These are the facts you see in headlines everywhere. That the S&P 500 is up 330% since the bottom of the Financial Crisis and it’s now up 105% for those who accidentally bought at the highest points before the Dotcom Crash or Financial Crisis.

Let’s chart it:

If you want to humble yourself, try adjusting all your returns and gains for inflation. I don’t know many people who do that and I think I know why. You are literally about to tell yourself you’re not as good as you thought you were.

So if you can stomach it, if you’re a real one confident in your abilities to fight the forces of inflation, keep reading. Because I will show you what Mordor really looks like.

Since the bottom of the Financial Crisis, inflation-adjusted S&P 500 returns are up about 150%. Not 330%. Had you bought at the peak of the Dotcom Crash, adjusted for inflation, you’re up about 40% right now. Had you bought at the peak of the Financial Crisis, you’re up about 50% right now. Basically each comparison had their returns cut in half.

Let’s chart the party no one wants to go to. Here’s the S&P 500 chart when it’s adjusted for inflation. The difference is startling in scope and pace compared to the chart we shared earlier:

Inflation-adjusted returns suck, I know. They are not as glamorous as nominal returns. But it’s a healthy reality check and a reminder of how important it is to keep up with the inflation rate. It’s also a reminder that you’re not as good as you think you are. Most of us, when we’re invested in risk assets, are just riding the waves of inflation.

If you have the guts to work on your own personal inflation-adjusted returns, please let me know. Hope you hang in there and just remember, the real ones know inflation well and want the challenge. The others will dance around their nominal gains and never speak a word about it.


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