What Is The Long Term Rate of Return?

The late economist, Murray Rothbard claims that the ancient Greek philosophers studied and discussed what today would be thought of as economic theory.  We should try to assess the effect. 

Socrates died 2,400 or so years ago.  At the time, Greece as a trading nation with control over important ports in the eastern Mediterranean.  The were craftsmen as well as philosophers.  They understood business.  How well has their economic leadership turned out?

Let’s look at how income and capital work.

Suppose people then worked and paid for their lifestyle.  Suppose further some invested part of what they earned in things like houses, businesses, olive groves and farms.  Not so different from what we do, but with a much narrower range of investments.  The point is they did their best to live as they preferred and put a little aside for the future or to pass on to their family.

Suppose everyone since did that too.

I saw an estimate recently that said the total value of wealth in the world was $US 241 trillion in 2014.  Could be right but who knows.  Let us be a little more conservative and assume it is $US 400 trillion.  About $57,000 per person.  You’ll see why that is conservative in a minute.

What would have been a fair rate of return on all that investment?  Houses, businesses, farms and forests,  bridges and highways, temples and schools, gold and silver.  Could we believe 1% is safe?

As it turns out 1% is too high, massively too high.  $400 trillion today needed total world assets 2400 years ago worth just $US 17,000 today’s money.  Seems a little silly that the total value of terrestrial wealth was $17,000 and there were somewhere around 20,000,000.  Eight one hundredths of a cent per person seems low.

Let’s try this.  Everyone had a net worth of $5,700 for a grand total of $114 billion.  The yield required is to achieve the wealth today is about 34 basis points.  34 hundreths of one percent.  Why?  Many people think earning 10% is a reasonable goal.  Seems not!

The answer is that investing is variable.  Losses happen.  Things are destroyed by nature or by wars.  People lose things or ships sink or governments expropriate valuable assets and return nothing of value in their place.

If you are putting wealth aside for future use, then learning how to defend against losses is the place to start.  That will be true even if all the guesstimates of per capita wealth are wrong.  The first rule of making money is avoid losing money.

Many of us are optimists.  We seldom see the dark side of markets.  We are impatient.  We are not willing to invest in assets that do not produce an increasing value.  I have trouble with the idea of negative rate bonds like CIBC just sold or paying to store gold and silver that costs to keep and produces nothing.

All of us must look to the easy loss prevention.  Protect your income and the personal capital value that creates.  Avoid taxes to the extent possible.  Avoid paying interest for loans that acquired non-productive assets.

Find people who can help you overcome your blind spots.  Be brave while a little terrified.  Invest in things you cannot lose, like skill and knowledge and attitude.  Insure against catastrophic losses.  (Let someone else lose)  Live on less than you earn.

It is mostly common sense.

Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario.  In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.

Please be in touch if I can help you.  don@moneyfyi.com  866-285-7772

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