When evaluating the potential return on your
investments, it's important to look at the impact of inflation on the returns of different classes of securities. If your investment
isn't outpacing inflation, then the purchasing power of your
capital is shrinking rather than growing.
For example, the yield on Treasury bills
has never been lower than it was in 1938, at -0.02%. However,
after accounting for the impact of inflation, 1946 was the worst
year to be invested in T-bills. Although the yield was a very
modest 0.35%, the inflation rate that same year was over 18%.
That means that in terms of actual buying power, the value of
a T-bill investment dropped by over 17%.
The picture changes slightly over the long
term. Between 1926 and 2003, Treasury bills returned 3.8% compounded
annually, before accounting for inflation. But the real rate of return — or inflation-adjusted return — was only 0.8%
annually. What this means is that while a dollar invested in Treasury
bills in 1925 was worth $17.66 by the end of 2003, in terms of actual buying
power it was worth only $1.72 by 2003.
These figures demonstrate that while investing
in T-bills may be a sound technique for preserving capital, historically
they have fallen short as growth investments. In fact, over the
long term their return has barely outstripped inflation.
Jeremy Siegel, The Wharton School 
