One of the best sounds in sports is the swish of basketball as it passes through the net. The ball flies over the rim and touches nothing but net. I love watching long range shooters drain effortless, smooth three pointers. Some of the greatest shooters in the game have been Larry Bird, Kobe Bryant and Steph Curry. My favorite long range shooter was Meodowlark Lemon of the Harlem Globetrotters. He would meander to the half court line, say a few jokes, launch a sky hook and it would swish though the net.
My friends and I used to play H-O-R-S-E at the local park. Our shots were creative and crazy. The stakes went up when one of us would call a shot with a swish. The basket would only count if it was a swish. If the shot hit the backboard or the rim, it didn’t count. The swish shot put added pressure on the players.
Investing has its own version of nothing but net. It’d be nice to bank gross returns but this isn’t possible. Gross returns are impressive but you can only spend net returns. To calculate your net return, you must subtract inflation, taxes and fees. The net return is what you can spend to buy food, gas and other household items.
Let’s review some net returns.
Stocks. The gross return on stocks from 1926 has been 10%. A 10% return is impressive especially when it’s compounded over 90 years. Inflation during this time frame averaged 2.9%. Subtracting inflation, the gross return for stocks falls to 7.1%. Minus a 28% tax rate lowers your return to 5.1%. If you work with an advisor who charges 1%, your net return is now 4.1%. Netting out inflation, taxes and fees your 10% gross return cascades 59% to 4.1%. A $10,000 investment in stocks will grow to $372,000 over 90 years with a net return of 4.1%.
Bonds. Long term government bonds averaged 5.6% for 90 years. Inflation reduced this return by 2.9%. Subtracting taxes and fees your net return is now .94%. A $10,000 in bonds is now worth $23,200.
Cash. The cash return will leave a hole in your wallet. The one-month U.S. Treasury Bill averaged 3.4% since 1926. Subtracting inflation, taxes and fees your net return drops to a negative .64%. A $10,000 “investment” in cash is now worth $5,611.
You need to own stocks to create generational wealth. A heavy dose of bonds and cash in your portfolio is an air ball. It’s recommended to keep a large portion of your portfolio in stocks so you can stay ahead of inflation, taxes and fees.
I hate to lose more than I like to win. ~ Larry Bird
Bill Parrott is President and CEO of Parrott Wealth Management. For more information on investment management and financial planning, please visit www.parrottwealth.com.
May 7, 2017
Note: Your returns may be more or less than those posted in this blog.