This is one of those charts that I kind of wish I never made because it is so depressing. Out of morbid curiosity, I wanted to see how much the S&P 500 has returned in real terms since April 1999. I chose April of ’99 because it just so happens that the S&P price index was at about the same level as we are at today.
Start with the red line as our base case. This is the total return of the S&P 500 which includes dividends being reinvested. If you held a portfolio of S&P 500, you would expect that you would be up a whopping 26.6% or about 2.2% annually over 12 years. Not very exciting considering the amount of paint that you had to endure in the process. Nonetheless, an investor that started with $100 and ended with $126 is just happy to be above his starting investment and definitely happier than he was when his investment slipped into the $60′s twice during that period.
The really interesting story is when you add inflation to the mix. If we believe that the CPI is a perfect representation of inflation (it is not) then we would consider the blue line our real return over that period – a loss of 6.42% or -.53% annually for 12 years. Consider this your invisible inflation tax. This is much better than the $73.75 of buying power that you would have had if you just stuffed the $100 in your mattress, but that certainly does not seem to be comforting given the volatility you had to absorb to lose only 6.4%. If you really want to be a pessimist and believe that Gold is truly the only store of value, then you are sitting on a mere $23.2 for being fool enough to invest in stocks rather than gold.
Inflation is an insidious tax. Insidious because the dealer steals your chips while you are not looking, just a couple at a time, but adding up to a significant sum at the end. The government benefits from it because it is direct source of revenue. Debtors benefit from it because their loans become less valuable than their assets. Savers are the suckers.