Sunday, April 1, 2018

What Is The Aggregate Real Rate of Return of Risky and Safe Investments In The Economy?

 About four weeks ago in my Weekly Research links provided on a daily basis to subscribers, I linked to a NBER study through an ungated earlier version, because NBER paywalls the general public.  The title is "The Rate of Return on Everything, 1870–2015" by Jorda, Knoll, Kuvshinov, Schularick, and Taylor.  The paper asks "What is the aggregate real rate of return in the economy? Is it higher than the growth rate of the economy and, if so, by how much? Is there a tendency for returns to fall in
the long-run? Which particular assets have the highest long-run returns?" using data from 16 advanced countries from 1870 to 2015.

This paper is not only interesting in its analysis of risky and safe assets but of its analysis of equity, housing (rental), US dollar, different portfolios, periods excluding world war, before the Great Financial Crisis, and the effect of GDP weighting.  The difference between risky rate and return of capital on portfolio weighted and equal weighted portfolios on page 48 show why it is so hard for pension funds to out perform, particularly when pension funds load up on high advisor and investment management fees rather than use low expense mutual funds, ETFs, MLPs, and closed end funds.

For the individual investor or trader, it shows, if not confirms, that overtime return is about the same from year to year averaged for the period, which is consistent with a log plot of a fractal analysis of the market, which would yield a straight plot line consistent with a power rule.  Truly risky investments have a life of 60 days to six months before the deconstruct. 

A diversified portfolio will better serve the average investor over time.  Those who have money they can afford to lose and use professional techniques which require constant attention to movement may profit from a risky investment position for a period of 60 days to six months depending on how fast the position deconstructs, but then we have seen how many high fee hedge funds dive when the market turns against them, because they maintain risky positions too long. 

The very rich become more wealthy not from investing per se, but from the rentier profit from the efforts (work) of others.

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