People on this site often recommend that investing in an index fund is a good, passive way to make money long-term.

But this is clearly not true.

Even if we ignore the risk associated with investing money in stocks and only consider some sort of best-case scenario by pretending you always get a 7 % return annually, you then have to subtract

1. Commission fees to the broker.
2. Inflation.
3. Pay the index fund.
4. Capital tax.
5. And finally, since you get money in the future, you have to remember to use the prevailing interest rates to calculate the present value of your return.

So, let's say we invest 100.000 dollars, and get a 7 % return, i.e. 7.000 dollars a year later. Say you pay 25 % in taxes. You then only get 4.550 dollars. So you have 104.550 dollars now. Say you pay 0.4 % to the index fund. That's about 400 dollars, so say you now have 104.150 dollars. Let's calculate the present value before we subtract commission fees (which are of course paid in the present). If inflation is 3 % and the interest rate is 1 %, then we need to discount by 1.04, which gives us 100.144 dollars. Subtract 144 dollars for the commission fees, and you end up with the exact same amount you started with! All you've done is beat inflation, basically.

And remember, this is a best case scenario. In real life, you will have to face risk as well.

Is this analysis correct?

People on this site often recommend that investing in an index fund is a good, passive way to make money long-term.

But this is clearly not true.

Even if we ignore the risk associated with investing money in stocks and only consider some sort of best-case scenario by pretending you always get a 7 % return annually, you then have to subtract

1. Commission fees to the broker.
2. Inflation.
3. Pay the index fund.
4. Capital tax.
5. And finally, since you get money in the future, you have to remember to use the prevailing interest rates to calculate the present value of your return.

So, let's say we invest $100,000 and get a 7 % return, i.e. $7,000 a year later. Say you pay 25 % in taxes. You then only get $4,550. So you have $104,550 now. Say you pay 0.4 % to the index fund. That's about $400, so say you now have $104,150 dollars. Let's calculate the present value before we subtract commission fees (which are of course paid in the present). If inflation is 3 % and the interest rate is 1 %, then we need to discount by 1.04, which gives us $100,144. Subtract $144 for the commission fees, and you end up with the exact same amount you started with! All you've done is beat inflation, basically.

And remember, this is a best case scenario. In real life, you will have to face risk as well.

Is this analysis correct?

People on this site often recommend that investing in an index fund is a good, passive way to make money long-term.

But this is clearly not true.

Even if we ignore the risk associated with investing money in stocks and only consider some sort of best-case scenario by pretending you always get a 7 % return annually, you then have to subtract

1. Commission fees to the broker.
2. Inflation.
3. Pay the index fund.
4. Capital tax.
5. And finally, since you get money in the future, you have to remember to use the prevailing interest rates to calcualte the present value of your return.

So, let's say we invest 100.000 dollars, and get a 7 % return, i.e. 7.000 dollars a year later. Say you pay 25 % in taxes. You then only get 4.550 dollars. So you have 104.550 dollars now. Say you pay 0.4 % to the index fund. That's about 400 dollars, so say you now have 104.150 dollars. Let's calculate the present value before we subtract commission fees (which are of course paid in the present). If inflation is 3 % and the interest rate is 1 %, then we need to discount by 1.04, which gives us 100.144 dollars. Subtract 144 dollars for the commission fees, and you end up with the exact same amount you started with! All you've done is beat inflation, basically.

And remember, this is a best case scenario. In real life, you will have to face risk as well.

Is this analysis correct?

People on this site often recommend that investing in an index fund is a good, passive way to make money long-term.

But this is clearly not true.

Even if we ignore the risk associated with investing money in stocks and only consider some sort of best-case scenario by pretending you always get a 7 % return annually, you then have to subtract

1. Commission fees to the broker.
2. Inflation.
3. Pay the index fund.
4. Capital tax.
5. And finally, since you get money in the future, you have to remember to use the prevailing interest rates to calculate the present value of your return.

So, let's say we invest 100.000 dollars, and get a 7 % return, i.e. 7.000 dollars a year later. Say you pay 25 % in taxes. You then only get 4.550 dollars. So you have 104.550 dollars now. Say you pay 0.4 % to the index fund. That's about 400 dollars, so say you now have 104.150 dollars. Let's calculate the present value before we subtract commission fees (which are of course paid in the present). If inflation is 3 % and the interest rate is 1 %, then we need to discount by 1.04, which gives us 100.144 dollars. Subtract 144 dollars for the commission fees, and you end up with the exact same amount you started with! All you've done is beat inflation, basically.

And remember, this is a best case scenario. In real life, you will have to face risk as well.

Is this analysis correct?