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Do I have any rational expectations to beat inflation by having well diversified index funds?



Historically, as a guideline, you'd have made about 7% p.a. on average, well above inflation. The question is whether you can handle the drawdown (can you keep your nerves during a crash?)


then again: beware of averages. Historical PE ratios are quite high (though EV/FCC would be more instructive) - so it is unlikely that the next couple of years will bring 7%. We're living in a world of free money: if central banks change interest rates the party could come to an end.


Not necessarily. If the interest rates are reduced because the economy improved, then the growth could stay similar.


Aren't interest rates reduced to stimulate a struggling economy, and increased if economy improving?


Right. If interest rates are increased, that's a sign of a stronger economy and the market might go up in response. On the other hand, traders might decide the Fed is mistaken, the economy is not in fact stronger, and they'll react to the higher interest rates by taking fewer loans and the market will go down.

Basically, the change is already priced-in and you shouldn't worry about timing the market. Buy and hold.


Interest rates go up when the economy is improving.


Oops. That's what I meant to say: s/reduce/increase/


>Do I have any rational expectations to beat inflation by having well diversified index funds?

You should get inflation + some economic growth + risk premium for holding equity.


How confident can I be of this? Why are banks struggling to get even 2% return on their investment if I can just go on and get 7% on average?


There's no guarantee at all. In a really bad year (2008?) you might get -50% or worse. Then you might get some really nice returns in the years after (or not!). If you average over several decades, historically, the returns have been around 7 or 8 per cent per year, but the standard deviation is enormous. Just look at a long-term chart of e.g. the S&P 500 at https://finance.yahoo.com/chart/%5EGSPC - click "Max" and "Settings" -> "Logarithmic" (you'll want a logarithmic axis so that equal percent changes are equal distance on the plot). You'll see that on average it went up over the decades, but between June '07 and February '09, it lost over 50%, and tripled since then.

I encourage you to read up on this, but someone else with more knowledge should recommend some books.


All of this is correct, but the standard S&P 500 index doesn't include dividends, so your typical index fund will (should) do 1-4% better each year than the S&P 500. The S&P 500 does have a lesser-known version that includes the total returns: https://www.google.com/finance?q=INDEXSP%3ASP500TR&ei=WWJNWK...


Index funds such as SPY do include the dividends. VGO (specifically) also has a 1.94% yield.


Banks operate on a completely different model so it's not a useful comparison, but the answer is that they are borrowing at ~0% and lending 2%+ so they view the world differently


banks are heavily regulated and cannot just put deposits (the money you put into a bank constitute a loan to the bank) into stocks. They have to invest more conservatively, e.g give money to solid companies or hold low risk bonds. See Basel-rules to learn more about risk weighted assets (RWA): https://en.wikipedia.org/wiki/Basel_III


>if I can just go on and get 7% on average?

I didn't mention any numbers. If economic growth is low, and inflation is non-existent, you will not approach 7%.

>Why are banks struggling to get even 2% return on their investment

Where do you get that information?


risk --> reward.


bond etfs have been sold off, so they are cheap and yields are up.




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