Stocks, Munis Have Best 'Real' Returns Over Long-Term, Thornburg Study Finds

Annual study factors in inflation, taxes and costs

Common stocks and municipal bonds have had the highest long-term "real" returns for taxable accounts over the last 30 years, according to an annual study by Thornburg Investment Management (Thornburg) released Monday, August 23.

The study, called "Real Real Returns," was different, Thornburg said in a news release, because it adjusted returns for inflation, taxes and costs. For wealthy investors, these factors are particularly important because of the size of their investments and related management costs, as well as the bigger tax burden.

Over a 30-year period ending in 2009, Thornburg's study showed inflation averaged 3.51%, and for investors in the top tax bracket, marginal Federal tax rates averaged 40%. The study used a 0.50% expense charge for all investments or asset classes, except real estate.

The study by Thornburg, based in Santa Fe, New Mexico, showed that the best performing asset class over the 30-year period was large- and small-cap U.S. stocks. Large-cap stocks returned 11.24% on a nominal basis (based on the S&P 500 Index), but once fees, taxes and inflation were introduced, the return fell to 5.21%.

"If you are not earning real real returns, you are gradually losing wealth," said Johnathan Burnham, managing director at Thornburg, in the news release. "We strongly encourage advisors and investors to evaluate investments net of expenses, inflation, and taxes in order to measure their true or bottom-line effectiveness. Investors too often look at investment performance net of expenses only. That's only one-third of the equation."

The study said, though, that in the past five to 10 years, stocks lost much of their investment luster and government and corporate bonds showed greater strength. Municipal bonds were particularly beneficial to investors in higher tax brackets because their returns were generally exempt from taxes. The study showed that munis' "real" returns over 30 years were 3.33%, which exceed corporate bonds or treasuries, and made munis the second best performer class (based on returns of Moody's 10-yr AAA Muni Index).

The worst returns were in commodities, which lost 3.50%, and even when unadjusted made only 0.46% over the life of the study.

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