Nominal investment performance numbers give us a false sense of how hard our money is working for us. Real returns, which are adjusted for inflation, look much worse over the long term.

One analyst also factors in the effects of taxes and fees to produce “real-real returns,” which are even more pathetic:

Garrett Thornburg, founder of Thornburg Investment Management in Santa Fe, N.M., calculates what he calls “real-real” returns, adjusting stock performance not only for inflation but also for real-world drags such as taxes and fees. Nominally, a dollar invested in the stocks of the Standard & Poor’s 500-stock index at the end of 1978 had blossomed to $22.88 at the end of 2008, including dividends, a sweet gain even after the 2008 meltdown. But once estimates of inflation, taxes and costs are removed, he figures, the investment was worth $3.76.

All of this might be enough to put investors off stocks entirely, until they consider the long-term alternatives. Measured over the 1978-2008 period, rather than over just one decade, stock performance in real-real terms actually is better than that of just about any other major investment class, Mr. Thornburg found: 4.5% a year. Stocks’ ability to keep up with inflation over the very long haul may be their best selling point.

In real-real terms, stocks did better over that period than municipal bonds (2.5% a year), long-term government bonds (2% a year) and corporate bonds (0.2% a year). Real-real home prices were unchanged over those 30 years. Both short-term government bonds and commodities suffered losses.