What Would Be A Real Return On Investment?

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Robert A. Mamis maintains that an investor loses if his investments yield less than the rate of inflation plus the going rate of interest. Theoretically, interest rates compensate the investor both for his loss of purchasing power and for the use of his money.

The real break-even point is after taxes. In Mamis's example of 12% inflation and 16% interest rates, a taxpayer in the 50% bracket must earn 24% to keep pace with inflation. Therefore a yield of 28% will give the investor a real return of 2% after all taxes are paid. Historically, investors have been satisfied if their investments yielded a real return of 2% after tax.

EDITOR-NOTE:

Robert A. Mamis replies: These days, money-use return, like usury laws, can no longer be viewed in historical context.Interest rates plus inflation rates plus tax rates all conspire against using ordinary investment measures, of which a 2% after-tax return is a particularly antiquated one. To break even in a traditional sense would require earning the inflation rate -- say, 12% per year. But if you break even you obviously lose badly when at the same time money is making 18%. It's a mistake to assume that inflation is "built into" high interest rates. The two are separate. Indeed, inflation rates have recently been coming down while interest rates have edged higher. What is happening, simply, is that money rental costs are climbing, apart from inflation. So the two can be added for a true picture of what constitutes "satisfactory" returns in today's crosscurrents.