This is what's so surprisingly scary about time value of money to me. Many "spectacular" investments that double or triple money over a decade or 2 are simply not all that great if you just calculate the annualized return and factor in the inflation.

Back home, I've had so many agents try to sell me inferior insurance and investment opportunities dressed up as insane deals hoping I wouldn't look too much into the details. I was really lucky to come across the folks at /r/indiainvestments who frequently warn about this. But I am sure there are many others who are not aware of these things and fall for them.

I suppose you have heard about the rule of 72 - it's quite useful for roughly figuring out doubling rate from compound interests, and vice versa:

https://en.wikipedia.org/wiki/Rule_of_72

I guess doubling in 10 years corresponds to annual percentage of 7.2 percent, and 20 years, 3.6 percent. Adjusting for inflation, the rate will be lower.

BTW, you may be referring to Unit-linked insurance schemes. They are neither good as insurance, nor good as investments.

Insurance companies should not be used to invest your money. They are insurance companies. Much better choices exist for investment managers.

You may be right about “should” but the insurance industry is basically an investment industry financed by premiums and always has been.

It is common practice for PE firms to buy insurance companies in order to better manage the investment side of the business.

Another bias: we cherry picked the country which became the world dominating super power. How would a similar calculation look like for countries like UK or France, which used to be close to the top in early 20th century, but did not achieve global dominance?

You could take a 50 year look at the Nikkei index.

https://tradingeconomics.com/japan/stock-market

On the other hand, two generations would be dead after 100 years and federal inheritance tax is 40% and has been higher and the exemption limit was only about $500,000 up till the 90s, so that return is not so great, mainly because of taxes. If you are a tax exempt foundation like an Ivy League University, it's absolutely awesome though.

And if you felt like passing it down your family tree, the number of people would have multiplied by an order of magnitude, diluting the share each grandchild ends up with.

The richest woman alive [by far] is the grand daughter of L’Oréal founder. Bloomberg puts the family’s stake all in her name. The info bit also says French inheritance says 50% has to go to one person. So for at least a few generations, the majority of the wealth can remain consolidated.

That's a bit shocking about the French inheritance law. It must create awful family tensions when there are more than 2 children.

If I remember correctly the rules for minimum inheritance, it’s actually (n-1)/n of the inheritance has to be dedicated to the children, where ‘n’ is the number of children.

Each child is entitled to 1/n of that.

If I have 5 children, I have to give them 4/5 of the inheritance. Each one will have 1/5 of that 4/5.

And in the case of a sole child, she must receive 100% of 50% of the inheritance, at least.

OK. That makes more sense (except (n-1)/n=0 when n=1). In New Zealand too, you're required to give some inheritance to each of your children. There isn't a formula but lawyers seem to have observed that a minimum of about 10% each is acceptable.

In the U.S, it is ok to completely disinherit children. It has to be done so explicitly though.

You say that like it's a bad thing?

Dead people don't need money, and an inheritance is infinity% return on 0 investment.

Yep. Also, if I want to get pleasure from a bag of candies using my hard earned money, most people expect me to pay sales tax and candy shop taxes from profits and whatnot. But if I happen to want to get pleasure by giving the money away to my kids, I should absolutely not be taxed. Or to a charity, in which case I should not only not pay any taxes, but I should also be for some incomprehensible[1] reason be able to deduct the expenses in my taxation... Well, I guess nobody has promised that people should be logical in their preferences.

[1] Yes, yes I know. Charities are supposed to do some good. How, exactly, providing income to candy shop owner so that they can buy education for their kids is less good than your average tax avoidance charity scheme?

> deduct the expenses in my taxation

You don’t get to deduct the expenses from your taxation. You get to deduct the expenses from your taxable income.

That’s a big difference. You can’t make money on taxes by giving it away to charity (unless that charity is somehow fraudulently enriching you).

Related, because of double digit inflation during the 1970s, most people don’t realize how bad the crash was from 1966 to 1982. Going from near 1,100 to 800 sounds bad but not record breaking. But factor in the double digit inflation and it is an 80% crash, slightly worse than the 75% crash of 1929-1933. It’s that 16 year crash that lead to the famous 1982 cover story of BusinessWeek “Is this the end of equities?” Of course, after 1982 the market grew at a remarkable clip till 2001, and in 2021 it’s currently up by more than a factor of 35 over 1982.

Some interesting parallels between the 1970's and the 2020's, both seeing global economic growth stagnating after a protracted boom period ending in major economic crises, inducing a kind of awkward period of digestive realignment.

It is remarkable how overlooked that era is today, despite it being a highly transformational time and economically very distinct, yet it's remembered mostly just by disco and unusually gritty movies.

Perhaps because compared to the revolutionary 60's (and later rebuilding of the 80's) it's a more confusingly anarchic time with no clear narrative to grasp a hold of to make sense of it.

More like a messy organic reorganisation as both the counter-culture and traditional culture lost coherence in the face of high unemployment & high inflation, and with society's rule book torn up but no clear path to a better one.

Maybe being a time of social fragmentation and escalating ambient mayhem from crime, hijackings, bombings etc, the best way to make sense of it is actually to watch those great auteur movies unique to the era dripping with atmosphere and mood. Less of a narrative, more a vibe.

It also includes some survivorship bias. The Dow only includes companies with a market cap above a threshold.

In order to get a better estimate of returns it would have to include the cost of redistribution of investments due to the changes in companies that constitute the Dow. Some of these companies that dropped out of the Dow would also have been trading near insolvency, and the losses associated with investments in them need to be accounted for.

That ignores dividends. That will add a couple of percentage points to the return.

If I rerun the calculation from the cherry-picked peak of about 360 in 1928, I get around 4.5% after inflation, without dividends.

The article says "total return", and the price index only increased by 513x (from 68.63 to 35,208). so I'm pretty sure they're including dividends.

True. I missed that. The calculator at [1] gives totally different returns with dividends reinvested, though: 7.6%.

[1] https://dqydj.com/dow-jones-return-calculator/

I am including dividends.

I sometimes wonder if there are some long forgotten brokerage accounts just idly compounding.

There aren’t, actually, at least not in the US. When an account has no activity on it for long enough, it gets liquidated and transferred to the state until someone with a rightful ownership claim comes forward to claim it. This is called “escheatment.”

https://en.wikipedia.org/wiki/Escheat

Though dividends paid in cash don't really count as compounding no?

You can reinvest them it or he stock after you’ve paid income taxes on them.

I'm pretty sure they use a price that accounts for dividends. Or they should anyway unless they're doing it wrong.

Compounding works best when dividends are immediately reinvested... it also pushes up the total return considerably.

DJIA is also a pretty dumb index.

While I agree, this Planet Money episode from 2012 goes into the details of why.

The thing that jumps out to me as the dumbest is that it uses raw share price instead of market capitalization.

https://www.npr.org/sections/money/2012/02/07/146546183/why-...

I remember hearing about this after Apple did a stock split a little while back; apparently it completely tanked the Dow Jones due to the price per share being lower. I think they decided to add some new tech stocks or something to try to compensate for it, but finding out that they used the raw share price just made me stop paying attention to the Dow Jones ever.

It's a pretty dumb methodology, but it's kind of OK as a basic meter of how 30 big companies are doing and as a proxy for big companies in general. As long as you're mostly comparing between time periods and adjusting for splits and what not.

CPI drastically understates inflation--- my guess is that real returns after 'real' inflation are pretty close to zero

Sources? I could be argued that due to "hedonic" improvements CPI understates inflation (viz, the entry level Apple laptop today costs about as much as the entry level Apple laptop 20 years ago, but is vastly better).

*overstates

One could plausibly claim it over the course of a few years, but look at 20-30 year average already makes it entirely implausible. Just because of compounding, that would mean 30-year old prices being 5x mistaken, and 60-year old prices 25x mistaken.

Only reason why some people think CPI is wrong is because people psychologically tend to ignore prices on things that are going down, only mentioning those that are going up. Prices on almost all food, all clothes and most energy (surprise!) are down vs 1921 CPI-adjusted price, and prices on housing are up per unit but down per square foot.

>Prices on almost all food, all clothes...

But can we even compare food and clothes from 1920s to today? Of course prices have gone down, and the quality has diminished greatly along with the prices. None of our food is nearly as nutrient dense as it was in the 1920s. Large yields is what the large producers care about. What does this mean for most foods mass produced these days? More water added. You're paying less, because you're getting significantly less.

...and the leaded gas in 1921 smelled so much better

Hehe. I don't care much about the smell, but I can tell you the leaded AV gas I use in all of my small motors, directly leads to me not having any engine knocks, easier starting, cooler at run-time, and in two decades of chainsaw operation I haven't had to clean or "rebuild" a carb. Yes, leaded gas is a whole lot "better" technically, than all of the additives we put into "gas" today. Gas really should be called something completely different these days to differentiate it from what it once was.

But it contained the great depression which probably will never happen again. Same for 2000-2010 period. It may be cherrypicking but given that bull markets are much longer than bear markets, the median return from 1940-1970 and then from1980 to 2000 and then from 2010 to now gives you a better idea of the returns going forward. The odds are you will be in one of the 8 winning decades instead of the two losing ones. In the absence of bad decades, and given how low interest rates are , how fat and strong corporate profits are, and low inflation is, real returns of 15-25 percent per year going forward would not surprise me.