Measuring Real-World Inflation versus Investing Returns

Raymond James’ Jeff Saut made reference earlier this week to a WSJ article from February of this year; I adapted part of that in my market comments today.

Here’s the WSJ excerpt:

“If you have a house that you bought in 1970 for $100,000 and sold it for
$400,000 today, the gain was just inflation – you made nothing. In fact, you may
have lost money if you paid a 6% sales commission.” Also adding insult to the
inflation-injury has been the massive decline in the purchasing power of the
dollar since 1970."

-WSJ, Quoting Garrett Thornburg of Thornburg Investment Management

That number seemed a little light to me — so I went to the BLS Inflation Calculator. It turns out that if you bought a home for $100,000 in 1970, it is the equivalent of $514,948.50 in 2006 dollars. 

Still, that’s a pretty astonishing number, and it makes Thornburg’s point that you have to consider inflation in your expectations for performance. After all, its the real (not nominal) numbers that matter most.

Nada_zilch_nothing

>

Sources:
BLS Inflation Calculator
http://data.bls.gov/cgi-bin/cpicalc.pl

For Long-Term Investing Plan, Measure Real-World Return
E.S. BROWNING
WALL STREET JOURNAL, February 6, 2006; Page C1
http://online.wsj.com/article/SB113918337699965515.html

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