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How Your Returns Stack Up To The Rising Cost Of Living

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How Your Returns Stack Up To The Rising Cost Of Living

You’ve held the same stock for the last 10 years. In that time, you’ve been in the green and you’ve been in the red. The charts finally show a gain — and 10 percent at that.

But it’s not yet time to celebrate. Over the same period, the Bureau of Labor Statistics has recorded 20-percent inflation. That means your “gain” is as good as a 10-percent loss.

How Inflation Affects Your Holdings

The real value of your stocks accounts for inflation.

Inflation decreases the value of the dollar: $1 in March 2009 had the same buying power as $1.20 in March 2019.

The 20-percent inflation rate means that your cache of cash — unless it’s realized capital gains of the same rate — has lost value. Breaking even would require gains of 20 percent, and anything less is a loss.

The 10-year inflation rate means that Walmart Inc (NYSE: WMT)’s 98-percent gains really sit at around 78 percent. General Electric Company (NYSE: GE)’s 3.5-percent gain is actually a 16.5-percent loss. And the 1.2-percent decline in United States Steel Corporation (NYSE: X) is actually in the ballpark of 21.2 percent.

How To Calculate Wins, Losses 

Most charts convey “nominal” stock values and record value changes in dollar terms. What you want to compare are “real” values, which reflect value changes in terms of purchasing power.

The following are March-to-March inflation rates, according to the Bureau of Labor Statistics:

  • 20-year: 54 percent
  • 25-year: 73 percent
  • 30-year: 108 percent
  • 40-year: 264 percent

To determine the real gains or losses of your holdings, subtract the inflation rate from the nominal growth rate of the stock.

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