Rise Up’s Conservative Rate of Return

As the author of the Rise Up Theory of Economics I get unmercifully hammered by those whose say that the rate of return I use in computing the potential nest eggs for retirees under Rise Up’s personal investment account plan is grossly overstated at 10%. I have used 10% because the financial studies I use indicate a rate of return on the S&P 500 – a solid indicator of the rate of return on investments in stock – was 12.5% for the last 25 years and to be conservative I cut the rate I used down to 10%. See www.riseuptheoryofeconomics.com.

Now comes a university study that concludes that the annual rate of return for the S&P 500 was 12.8% for the last 30 years. According to the report, Warren Buffet, the premier stock investor during that period realized a 24.6% return on his company’s stock investments.

Therefore, my use of a 10% rate of return that turns the $240,000 investment of the payroll taxes of a $40,000 a year average American household income (or $6,000 a year for 40 years) into a $3.2 million nest egg over a 40-year working life is completely reasonable if we assume as we do under Rise Up that the investment of a taxpayer’s payroll taxes will be in indexed stock funds and the taxpayer cannot invade the account for any reason whatsoever during that period. See www.riseupamerica.us

So the next time you hear the excuse that you can’t earn a 10% rate of return on your stock investment you can point to the below study and to the one we have used in our work to prove that 10% is actually a low-ball figure. Just to be exceedingly clear the 12.8% and 12.5% figures include approximately a 3% price inflation factor but no wage inflation factor and therefore can be used to compare what you could buy today with a nest egg of $3.2 million.

More dramatically if the 10% rate holds, the taxpayer would earn a $320,000 income on his stock portfolio in his 41st year - a $27,000 a month income without invading his nest egg which he could will to the kids.

Warren Buffett Beat the S&P by 100 Percent


If you followed billionaire investor Warren Buffett’s lead and bought the same stocks he bought, you would have beat the Standard & Poor’s 500 Index by 100 percent over the past three decades.

Buffett’s incredible stock performance — one you could have easily piggybacked — was revealed in a new study by Gerald Martin of American Universityin Washington and John Puthenpurackal of the University of Nevada, Las Vegas.
These researchers found that investors like you could have reaped a 24.6 percent annual return if you simply purchased Buffett’s stock picks after he disclosed his holdings in SEC regulatory filings.

The S&P 500 rose 12.8 percent a year in the same 30-year period.
Buffett’s stock picks were so good, the study found that investors could have followed Buffett’s lead as long as four months later and still made the big returns.
Bloomberg quoted an investment analyst as saying even a monkey could have beaten the S&P simply by mimicking Buffett’s stock purchases.

Martin and Puthenpurackal conducted their study to find out if it was better to buy the stocks Buffett purchased, or invest directly in his Berkshire Hathaway Inc. holding company.

Their findings indicated that in recent years, investors would have done better creating their own Buffett portfolio and not buying Berkshire shares which rose a paltry 7.8 percent a year from 2002-2006.

Among Buffett’s biggest successes over the long term, his $11 million investment in Washington Post Co. in 1973 was worth $1.3 billion at the end of last year.
The advantage of taking a cue from Buffett in selecting stocks appears to be well known to a significant number of investors.

After Buffett revealed in April that he bought a $3 billion stake in Burlington Northern Santa Fe, the railroad company, its shares soared to record highs in May “as copycat investors followed Buffett,” according to Bloomberg.

When the stock then dropped sharply after the company said second-quarter earnings missed analysts’ estimates, Berkshire bought more shares.
“We don’t go in and out of the market,” Buffett told reporters last month.