Non-intuitive Examples of Compounding Returns • Hacker News Board

Re: Non-intuitive Examples of Compounding Returns

#21

Post by riffer » Thu, Feb 10, 2011, 3:22 PM UTC

orangecat wrote: post #19

WildUtah wrote: post #2

Of course, nobody can reliably get 5.04% after tax and after inflation compounding returns. (And nobody was able to over the long term in the Twentieth Century in passive investments.) If you put your money in the stock market over the past decade, for example, your return would be zero. And this is one of the best times to be cashing out. Most of the last decade would have produced negative returns. Less risky inves…

If you put your money in the stock market over the past decade, for example, your return would be zero. Not using dollar cost averaging.

Even assuming dollar cost averaging, the return is negative after taxes and inflation.

Re: Non-intuitive Examples of Compounding Returns

#22

Post by anamax » Thu, Feb 10, 2011, 4:55 PM UTC

WildUtah wrote: post #2

Of course, nobody can reliably get 5.04% after tax and after inflation compounding returns. (And nobody was able to over the long term in the Twentieth Century in passive investments.) If you put your money in the stock market over the past decade, for example, your return would be zero. And this is one of the best times to be cashing out. Most of the last decade would have produced negative returns. Less risky inves…

> Social Security is doing much better by comparison.

You're assuming that your younger co-workers are going to pay the benefits that Congress provides to current retirees.

My younger co-workers are pretty sure that their younger co-workers aren't going to honor those promises wrt them. My shoud I assume that my younger co-workers are going to honor those promises wrt me?

BTW - SS is only a "good deal" if you're well below the cap. If you're contributing at the cap, the return is much lower.

Re: Non-intuitive Examples of Compounding Returns

#23

Post by rstonge » Thu, Feb 10, 2011, 5:31 PM UTC

omh wrote: post #13

bugsy wrote: post #5

There are lots of articles like this. They seldom discuss the effects of inflation or properly plot things out on a logarithmic scale.

I agree about the effects of inflation, but why should things be plotted on a logarithmic scale?

If you have constant return (e.g. 5%) this will show up as a linear growth function on a log scale. It will be exponential on a normal scale, which over time gets very steep. Using a log scale allows you to compare the growth rates of different investments in a consistent way.