No, it’s lower than the normal “8%” you hear because I’m not averaging across time.
[+10%, + 1%, +9%, +20%, 15%] = 9% if you average the percentages, but this represents putting in $100 at the start of each year and selling any excess gains at year end. The way people invest of putting in $100 once and letting it compound* gives
*Actually people do even worse then this, particularly for hedge funds: individuals put money into hedge funds that recently outperformed but go on to reverse to the mean and underperform. So while the average annual returns are +30% −6% = 12% annualized, pretty good across time, but if you did 30% managing 100M and −6% on 1B then the dollar returns are net negative.
Is that 5.9% after subtracting inflation?
No, it’s lower than the normal “8%” you hear because I’m not averaging across time.
[+10%, + 1%, +9%, +20%, 15%] = 9% if you average the percentages, but this represents putting in $100 at the start of each year and selling any excess gains at year end. The way people invest of putting in $100 once and letting it compound* gives
1.1*1.01*1.09*1.2*1.15 = 1.6711662 total gain or
1.6711662^(1/5) = 10.8% annualized.
The technical terms for this is non-ergodic see https://jasoncollins.blog/ergodicity-economics-a-primer/ for a description.
*Actually people do even worse then this, particularly for hedge funds: individuals put money into hedge funds that recently outperformed but go on to reverse to the mean and underperform. So while the average annual returns are +30% −6% = 12% annualized, pretty good across time, but if you did 30% managing 100M and −6% on 1B then the dollar returns are net negative.