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Get real: how we delude ourselves about investments

In 1988, I bought $750 worth of special $5 coins, minted to commemorate the opening of Australia’s Parliament House. I figured it was a one-way bet to investment success. They were legal tender costing $5 and would always be worth at least $5, and if they became sought-after by collectors, the sky was the limit.

I found the box of coins recently while cleaning the attic. They are made of aluminium bronze, so not only do they have no valuable metal content, but they look slightly tarnished after 30 years. Eager to learn about my booty, I called a coin dealer to check their value.

“They are legal tender, so they’re worth $5 each,” he said with little enthusiasm.

“But they’re 30-years-old, packed in a commemorative sleeve, marking a proud moment in Australian history,” I replied, realising my expectations of untold wealth were draining away.

He sounded rather tired. “They made millions of them, and please don’t bring them in here. We’d charge you a handling fee to take them to the bank and collect $5.”

After I spent an hour in a major bank branch where they eventually accepted them, at least I received my money back, right? Wrong.

The importance of real returns

Most of us delude ourselves about our investments. For example, we talk about our winners while the losers sit quietly in the bottom drawer.

The biggest delusion is not adjusting rates of return for inflation, using what is known as the real rate. Every investment return should be expressed in real terms, because it reflects the true purchasing power of money. Even with inflation as low as 2.5%, $100 today will need to grow to $102.50 to buy the same basket of goods in a year. If your money is in a term deposit earning 2% a year, it’s a negative yield in real terms.

The Reserve Bank of Australia provides an excellent inflation calculator, linked here. Every time you think about money or investments over a long time period, put the numbers into this calculator for a reality check. It’s simple to use. All you need is the year you bought something and how much you paid, and the amount is adjusted for inflation to a current day equivalent.

Take my $5 coins (yes, please take them). My $5 paid in 1988 adjusted for inflation would now be worth $11.38, up 128%, with an annual inflation rate of 2.8%. If my coins had doubled in value, I could have deluded myself that turning $750 into $1,500 showed my investing prowess, but in truth, my money would not have retained its purchasing power.

Looked at another way, on average, what cost $1 in 1988 now costs $2.28. Therefore, what costs $5 now would have cost $5/2.28 or $2.19 in 1988. So my $5 has been eroded by inflation and now has the equivalent of $2.18 buying power. I didn’t really get my money back.

Many people proudly boast of the increase in the value of their house or investment property. Let’s say you bought an apartment for $500,000 in 1998. Average inflation of 2.6% compounded over 20 years reaches $840,000. Okay, property prices have done well in the last five years, but not only must you adjust for legal fees, stamp duty, maintenance and renovations, but the real price is 68% higher or $340,000 more than you paid.

While it might sound good to say you doubled your money if you sold the apartment for a million dollars, it’s likely you earned little in real terms (of course, there are many other factors such as rent and loan payments to consider in calculating the total real return).

Are we close to an Australian sharemarket all-time high?

The All Ordinaries Index is currently (1 July 2019) about 6,700. The all-time high for the index is 6,873 in October 2007, before the GFC. It then fell precipitously to a low of 3,112 in March 2009, a period that destroyed the wealth of many Australians. Over the past decade, the market has clawed its way back, with a strong first half of 2019. The 'all-time high' could happen later this year. There will be headlines and celebrations of the good times across the media.

But the All Ordinaries is a price index, similar to the price of apples or bananas. To measure the all-time high in real terms, the 2007 level should be adjusted for inflation. Using the inflation calculator, 6,873 in October 2007 is 8,800 in real terms.

So when the news breaks one day that the Australian market is at an all-time high, you can wisely tell everyone that it’s a couple of thousand points away in real (inflation-adjusted) terms - or whatever the number is at the time - and everybody should stop deluding themselves.


Graham Hand is Managing Editor of Cuffelinks.  

September 05, 2018

"Many people proudly boast of the increase in the value of their house or investment property".

Thank you Graham for talking sense, because most people engaging in such BBQ conversation and big-noting themselves, mentally discount the expenses that actually went into holding the asset in the first place.

August 30, 2018

Should have listed them on e-bay: e.g.


Original $750 investment (or a 150 coins), "may" now sell for $22.95 each or $3,442.5 total or a 21.8% return with no tax liability.

Graham Hand
August 30, 2018

Ha, thanks Richard. Mine were not 'proof boxed' with a certificate but a cheaper version in a plastic sleeve. If a coin dealer tells me not to bother bringing them in for $5, I highly doubt there's a market at $22.95. Besides, from what I can see on the ebay listing, that's a selling price with no takers, hardly a way to get rid of 150 of them. Of course, I could have waited for individual bids on each coin, thrown in free postage, visited the post office to post each one, pay for postage ... nothing else to do. G

Peter B
August 30, 2018

Nice article Graham.

'The greatest obstacle to pleasure is not pain; it is delusion.' ... Lucretius

August 27, 2018

Original 50 cent silver coin, Grange - various vintages, some first edition (signed) books; if only we knew back then half as much as we kid ourselves we know today. Even ego suffers from inflation.

August 27, 2018

Excellent article and well explained. It's exactly why I can say my salary topped out in real terms in 1974 and has gone backwards ever since then.

Also a perfect example of the need to sell and take profits and to set stop loss positions so you don't hold failing assets like those coins.

My very best ever buy was gold when Costello decided to sell at the bottom of the market.

All the textbooks say gold at $300 US an ounce is a buy signal.

August 27, 2018

Remember that Rae. Was too stupid to buy gold then, was worried about losing it in a robbery and worried about insurances. Would have been easy to just dig the coins under the floorboards. Mind you I also recall gold was $US32 an oz when I was young. Believe it was Nixon de-coupling the dollar from the gold standard. Alas, at that time I had no money, was just a trade apprentice at $US15 a fortnight.

August 27, 2018

Rae, in March 1980 I purchased 1 Kg Bullion 99.95 Silver for $857.00. Today’s buy back price is $613.10. The purchasing value in 1980 was probably about 2 weeks average salary – clearly well short of its current value which would represent little more than half the average fortnightly salary.

At the time silver was in rising demand. From 1945 until 1979 it had risen in value from $A8.30 per kg to $A637.00 per kg. The sales pitch was that silver was essential to an almost endless array of industrial processes and products eg relays and contact points in the production of TV’s, hi-fi equipment and electrical equipment, film and of course the then insatiable demand for silverware and jewellery. Regrettably, the silver market crashed within months of my purchase and it has never recovered.

You win some, you lose some!

August 27, 2018

On the other hand, my grandfather had war medals that were worth 200 British pounds in 1950. They were left to me but sadly I never received them due to some dirty dealings by other relatives. One is now worth over $100,000.
A picture frame owned by another relative was next to worthless when crafted but an antique dealer declared it would be worth thousands now if not for the fact that someone drilled two holes in it to hang it on the wall! Those two holes reduce its worth by 98%! And a vase owned by a cousin is part of a pair that an antique dealer says is worth $6000, but only as a pair. One on its own is next to worthless.

Collectibles can grow in value much faster than inflation, but it depends on the item, how many there were originally, and how many remain. In the case of my grandfather's medals, one was awarded to less than 300 soldiers during WWI and by 1950 only 40 could be traced. Regardless of value, I would never have sold it if it had passed to me, but I have no idea where it is today.

August 27, 2018

This demonstrates the huge flaw in the logic behind assets testing. A 65-year-old retiree who put aside $300,000 for an aged care unit today might need $800,000 or more by the time they require aged care, yet the government takes the view that they should be deprived of income for having that $300,000. A couple aged 65 with $840,000 is regarded as ''wealthy'' and denied any pension benefit, yet they may be receiving much less income than an aged pensioner and rapidly eroding their nest egg - which in reality needs to grow to keep pace with inflation. On the other hand, a couple aged 90 with $840,000 is assessed exactly the same, even though it's unlikely they will see much inflation or have any need of much of that nest egg.

Realistically, a pension that increases regularly is worth far more than $840,000 in the bank, despite the whines and envy of pensioners who never seem to acknowledge that while the saver is being deprived of the benefit of their past frugal living, the big spender is being indulged with gifts of $1 million or more of taxpayer money over the course of their retirement.

I have every sympathy for those who are struggling - whatever the reason - and for those who genuinely could not accumulate savings - but I think pensioners who envy and mount verbal attacks on SFRs need to think again about the gross injustices Self Funded Retirees suffer, and the fact that many of them are not nearly as well off as you think when the real facts are considered. It's nice to have those savings, yes, but it means a management and compliance headache, management costs, and the loss of potentially much more than $1 million in benefits others enjoy - sometimes for no better reason than that others indulged themselves more generously during work life, gave money to their kids, or bought a costly mansion.

I'm grateful that I can keep working and earning, because I know how little my savings will be worth 30 years from now, and longevity runs in my family.

August 27, 2018

OGR – one of our reasons for downsizing was exactly illustrated by your reasoning that the pension is better than $840k in the bank. Sold the big house in the capital city 8 years before pension age. Stopped a boring job and used most of the money left over after the purchase of a modest unit in regional Australia before I got to 65. Current rules are creating jizzelers and schemers of knowledgeable oldies. A universal taxable pension for all after 67 would be much better. people would invest their money properly and pay taxes on their earnings, pension included (like it used to be) instead of buying stupid trinkets and useless coins, medals and other memorabilia. As long as $10’000 hidden away is worth $30 more in your fortnightly pension, people will hide some away or go on cruises.

Peter C
September 04, 2018

OGR and Jim. I'd rather have the $840,000 than the aged pension. I can earn at least $40,000 a year just in growth from that $840,000. That combined with the dividends and distributions received will put me well ahead of the pension. Oh and tax is not an issue, if you use a super fund for at least part of that growth and income.

August 27, 2018

OGR, I don’t know people who envy and mount verbal attacks on SFR’s. Personally, our system is such that in my experience it is SFR’s who envy pensioners, particularly part pensioners who get the best of both worlds.

September 05, 2018

And when Gen X and Y retire, we'll be SFRs by necessity because there won't BE a pension to retire on then, and if there is, you (a) won't want it anyway because it will be so low, (b) the excuse will be "but you should have put more into super and (c) you'll have to jump through so many hoops just to qualify anyway, it will be next to impossible to do so.

The pontificating and grandstanding from the boomers that "I'm a self funded retiree" is amazing, they really "don't get it" that it's nothing special....

August 27, 2018

Sundays, SFRs have good cause, in many instances, to envy part pensioners. But there is evidence of deep envy on the part of green-eyed pensioners who seem to think the solution to all society's ills is to strip SFRs of their savings and hand them to those who have less.

While I sympathise with pensioners who are struggling, I see no merit in depriving people of fair rewards for effort, and I would remind pensioners that when the government attacked SFRs and part pensioners with a change to the assets test NOT ONE CENT was given to those in most needs. Thresholds were raised to give part pensioners and those whose assets placed them on the borderline more, but pensioners who had nothing GOT NOTHING.

September 05, 2018

And that's the issue, OGR.

When Gen-X and Y retire (if they ever get chance to), then your average house - which will be worth more than $1m in most cities by then - will be counted as part of the assets test because the line will be "what, why can't you sell it and live somewhere cheaper ? What's wrong with you ?"

Along with the cachet that "oh, you're a millionaire", except most people will be by virtue of just owning their own PPOR.

It's Government rules made by people with no financial literacy or real understanding.

August 27, 2018

I bought sheets of stamps back in the 1970s. Recently had them valued and they are worth face value. That means good for postage only. Given that posting a letter in the 1970s cost a few cents this represents a huge loss.
Value is not always easy to measure but there are criteria for this. Had the author purchased a gold commemorative coin then he'd be doing very nicely. Not because of the coin but simply the gold content. Same deal with shares. Look ahead at what is going to be in demand and cross your fingers.

August 27, 2018

Mick - I also bought stamps in 70s and worth little -except for a few "errors" and coin stamps (they have gone up in value) - I have some sports memorabilia that has gone up a lot - some shares bad one or two good. Rarity is the key. I have yet to be lucky picking a Microsoft, Cisco, Cochlear or Commbank (could have bought for $5 on release now $70+).
But do have 2 defined benefit pensions

August 27, 2018

Bob, you’ve hit the jackpot anyway. Those defined benefit pensions are like gold - appear fortnightly for the rest of your life, indexed and you don’t have to stress about managing your portfolio.

Peter C
September 04, 2018

Bob, If you have two defined benefits pensions, then you have won the lottery.

September 05, 2018

Exactly, what is Bob complaining about ? Be grateful that you have two DB pensions instead of the DC funds that everyone else has. First world problem much ?!


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