How Should Investors' Long-Term Returns be Measured? 

Abstract

We assess measures of long-horizon investment outcomes and clarify underlying trading strategy interpretations.  We focus attention on a measure we call the “sustainable return,” defined as the rate of periodic withdrawal for consumption consistent with the preservation of real capital.  We use this notion to highlight the role of return sequence risk, which is distinct from risk in the overall level of returns.  We illustrate this and several other long-horizon measures in a global stock sample, emphasizing limitations of the arithmetic and geometric means of short-interval returns and the necessity in many contexts to consider the reinvestment of interim cash flows.