Inflation can take a big bite out of stock returns

— -- Q: Everyone likes to say stocks do so great, in the long term. But since the great stock crash in the 1920s, how much has the stock market actually gained if corrected for inflation?

A: Investors aren't making any secret of their disgust for stocks.

Stocks have underperformed for such a long time that some investors are wondering if they're even worth the trouble.

And it's hard to argue with investors who have been patient enough, even to buy and hold for the past 10 years. Stocks, as measured by the Standard & Poor's, have returned a mere 1.9% a year between Sept. 1, 2001 and September 30, 2011, according to data from IFA.com.

And to get that paltry return, investors endured gut-wrenching ups and downs in the market. Making things worse, those returns would be all but consumed by the average annual inflation of about 2.5% to 3%.

Despite the poor past 10 years, long-term investors continue to stick with stocks. One of the sources of inspiration for long-term investors is a statistic that naysayers detest: the very long-term track record of stocks. Since 1928, on average, stocks have returned 8.9% a year as of September 31, 2011, says IFA.com.

But some investors wonder if even that return is distorted. After all, during that time the nation has witnessed significant inflation, which would have eaten into the returns. What you're asking is the inflation-adjusted, or "real," return of the stock market.

There's no question. Inflation has taken a serious bite out of the market's returns for investors. Adjusted for inflation, the stock market's returns have been 5.85% a year on average since 1928, IFA.com.

But before you throw up your hands and look at the 5.9% average annual return as proof investing isn't worth your time, consider the alternatives. Very few investments generate real returns anywhere near what stocks have over the long haul. Government debt investments certainly, haven't. The IFA 5-year Global Fixed Income index has generated a real return of just 1.8% since 1928.

Can stocks be frustrating in the short term? Absolutely. Can they even be disappointing over a decade or more? Yes, although that's less common. Even so, investors with balanced portfolios, historically, have been richly rewarded by stocks even after the hit of inflation.

Matt Krantz is a financial markets reporter at USA TODAY and author of Investing Online for Dummies and Fundamental Analysis for Dummies. He answers a different reader question every weekday in his Ask Matt column at money.usatoday.com. To submit a question, e-mail Matt at mkrantz@usatoday.com. Follow Matt on Twitter at: twitter.com/mattkrantz