Is the real average global equity return only 4.87%?

SneakySpectator

I'm looking at this fund https://curvo.eu/backtest/en/market-index/msci-world?currency=gbp and it shows the average annual return is only 7.69%. But if we deduct the average UK inflation rate of 2.82% that gives a real return of a measly 4.87%. Why is it so low? 

But if you switch currencies to USD it shows 9.9%. And if you deduct the average US inflation rate of 3.8% you get a real return of 6.1%

I'm not really sure how people are becoming millionaires through index funds when the average return is so low. Even if you invested £500 a month for 35 years at a 4.87% compounded interest rate you'd only have £626,000 at the end of it. 

I've been reading up about this whole "FIRE" investing thing but it seems like none of the youtubers talking about it are taking the inflation rate into account. They're all using pre inflation returns. Which if you did would give you a cool £1m after 33 years. 

So there's a discrepancy of like 400 grand between pre inflation returns and post inflation returns...

masonic

Yes about 5% real is the long term figure from equities based on things like the Barclays Equity and Gilt Study. It's still a lot better than bonds (about 1%) or cash (<1%).

What you may be missing is that "FIRE" usually involves a high savings rate such as 60% or more of your after tax income and a good salary (which means north of $100k pa in the US). Saving just £500 per month is peanuts by comparison, that's just £6k pa not even filling half of an annual ISA allowance.

If you can save the equivalent of $60k per year for 14 years, then investment returns will get you just about there and from that point the returns should generate enough for you to live a better lifestyle than you would have done during accumulation.

Of course YouTubers going on about FIRE would have enjoyed the best couple of decades of investment returns and historically low inflation (around double the average real return). Who knows what the future will bring for both investments and inflation.

Ivkoto

The time period in pounds and dollars is different ⬇️, that's why the difference. Also the exchange rates during these periods will be playing a big role in the returns.






In pounds, the annualised return is 10.6% ⬇️

GazzaBloom

As Dave Ramsey says “your biggest wealth building tool is your income”

Alistair31

You either settle for average or you go to the casino and try to beat the house. 

Good luck. 

IvanOpinion

Alistair31 said:

You either settle for average or you go to the casino and try to beat the house. 

Good luck. 

Been there, done that, and the house not only beat me, it gave me a good kicking and then jumped up and down on me - while laughing! So 'yay' to average.

Hoenir

SneakySpectator said:

I'm looking at this fund https://curvo.eu/backtest/en/market-index/msci-world?currency=gbp and it shows the average annual return is only 7.69%. But if we deduct the average UK inflation rate of 2.82% that gives a real return of a measly 4.87%. Why is it so low? 

The overall global stock market can only reflect the real world economy. There's nothing magical about investing.  Not an ATM that prints money for nothing. 

Key driver of long term returns is also reinvestment of income. Growth is all very well. Eventually  cash needs to be returned to shareholders in one form or another. 

MK62

SneakySpectator said:

I'm looking at this fund https://curvo.eu/backtest/en/market-index/msci-world?currency=gbp and it shows the average annual return is only 7.69%. But if we deduct the average UK inflation rate of 2.82% that gives a real return of a measly 4.87%. Why is it so low? 

But if you switch currencies to USD it shows 9.9%. And if you deduct the average US inflation rate of 3.8% you get a real return of 6.1%

I'm not really sure how people are becoming millionaires through index funds when the average return is so low. Even if you invested £500 a month for 35 years at a 4.87% compounded interest rate you'd only have £626,000 at the end of it. 

I've been reading up about this whole "FIRE" investing thing but it seems like none of the youtubers talking about it are taking the inflation rate into account. They're all using pre inflation returns. Which if you did would give you a cool £1m after 33 years. 

So there's a discrepancy of like 400 grand between pre inflation returns and post inflation returns...

There's a bit more to it than that........those are index returns, but you won't get that, as you also need to pay fund and platform charges. Then there's inflation......UK RPI over those 26 years was 3.4%pa, while CPI was 2.5%, so it depends which measure you feel is more representative of your reality.......but real returns could easily be more iro of 4% than 5%. That said, personally I'd be delighted with a 4% real return over the next 26 years, but I suppose that depends on your situation and expectations.

SneakySpectator

MK62 said:

SneakySpectator said:

I'm looking at this fund https://curvo.eu/backtest/en/market-index/msci-world?currency=gbp and it shows the average annual return is only 7.69%. But if we deduct the average UK inflation rate of 2.82% that gives a real return of a measly 4.87%. Why is it so low? 

But if you switch currencies to USD it shows 9.9%. And if you deduct the average US inflation rate of 3.8% you get a real return of 6.1%

I'm not really sure how people are becoming millionaires through index funds when the average return is so low. Even if you invested £500 a month for 35 years at a 4.87% compounded interest rate you'd only have £626,000 at the end of it. 

I've been reading up about this whole "FIRE" investing thing but it seems like none of the youtubers talking about it are taking the inflation rate into account. They're all using pre inflation returns. Which if you did would give you a cool £1m after 33 years. 

So there's a discrepancy of like 400 grand between pre inflation returns and post inflation returns...

There's a bit more to it than that........those are index returns, but you won't get that, as you also need to pay fund and platform charges. Then there's inflation......UK RPI over those 26 years was 3.4%pa, while CPI was 2.5%, so it depends which measure you feel is more representative of your reality.......but real returns could easily be more iro of 4% than 5%. That said, personally I'd be delighted with a 4% real return over the next 26 years, but I suppose that depends on your situation and expectations.

Well I was watching some youtube channels like Graham Stephen and Damien Talks Money and they're like "the average global stock market return is 9% - 10%. So when they do all their FIRE calculations they're using 10% as the benchmark but in reality you need to knock 3% off that for inflation, then there's GBP devaluation and other stuff so it works out more along the lines of 5%.

Oldhand_2

Well, I make the average annualised return over the last twenty years to be 10.6% in £ and 8.3% in $. I must be reading the charts wrong as the 20-year total returns are 644.7% in £ and 390.9% in $. That can't be right, can it?

SneakySpectator

Oldhand_2 said:

Well, I make the average annualised return over the last twenty years to be 10.6% in £ and 8.3% in $. I must be reading the charts wrong as the 20-year total returns are 644.7% in £ and 390.9% in $. That can't be right, can it?

Have you knocked off the 2.82% from that 10.6%? So in real returns it's more along the lines of 7.8%. Also it's worth mentioning the last 20 years have been phenomenal for the stock market so the returns might be a bit skewed.