All Yields Are Relativistic

Is relativism a bad thing?  Many would argue that there should be standards and absolutes, so for them relativism is not so good.

Some absolutes are impossible and believing in them can lead to ruin, so maybe relativism lives.

Einstein claimed that we live in a relativistic physical world.  Everything in it can be understood only in relation to other things within it.  Except for the speed of light in a vacuum, there are no absolutes.

There are more ways to see relativity than physics.  Most good financial plans are relativistic.

They relay on attaching the things you want with the resources you possess and the methods available to achieve your wants.  Most are powered by compound interest.  They are relativistic because your wants, the tools available, time and the rate of return you need to achieve your goals depend on other things.

For example, if you expect to get 7% returns averaged over a long time, you have inherently made several relativistic assumptions.  Among them are:

  • Management and other costs are 2% or so.
  • Income taxes are 0%
  • Inflation will be 3% to 4%
  • An investment playing field that is similar to the historic one
    • Availability
    • Integrity of reporting
  • Only modest government intervention in businesses
  • Time frame for you of 30 years or more

All, some, or none of these may prevail.  Your actual yield will depend on what changes and by how much.  Your actual returns are what you will live on some day in the future, so pay a little attention.

7% yield is common in planning today but you must not see it as an absolute.  It is not and cannot be absolute.

Things to do:

  • See what happens if you include taxation in your projection.  Be sure to time adjust it.  If you have long holding periods the effective tax rate is lower.  Also notice tax preferences like dividends and capital gains.  If the adjusted rate is much over 20% you might want to look at your tax plan in more detail.
  • See what happens if inflation is much higher and rates of return go up, but not as much.  Something like returns of 9% and inflation of 6%.  Taxes affect the entire yield, but you only benefit by the after tax, after inflation amount.
  • Eventually you will find that there is some relativistic assessment of future returns after taxes and tied to inflation that works for you.  Any yield more than  2% above inflation is likely pretty ambitious and you might want to rationalize that.
  • Regularly review and revise your plan as necessary.

Real life is highly variable and while there may be tendencies toward a near absolute yield, you may not check your brain alongside your coat when you visit a planner.  Tendencies for relativistic returns to hit their long average depends on frequent adjustment.  Be an active participant.


Don Shaughnessy is a retired partner in an international public accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario

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