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Is the real average global equity return only 4.87%?

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  • VNX
    VNX Posts: 458 Forumite
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    MK62 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%.


    Damien has some good content and as far as I’m aware he isn’t one if the FIRE brigade.

    there are lots of useful stuff on YouTube about finance and investing but as always look at a broad spectrum of content and don’t get caught up by anything. Especially the FIRE movement, it’s like a religion and most are completely blinkered
  • kempiejon
    kempiejon Posts: 841 Forumite
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    I swapped from a FTSE to global bent for my investing about 15 years ago when I read the UK had only been returning 4.5% real while US showed 6% real over 50 years. It was around that time that I clocked how small a part the UK was compared to the global market and although UK listing do have global reach it is still a small sample. I collected most of the US decade of growth.
  • EthicsGradient
    EthicsGradient Posts: 1,264 Forumite
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    edited 21 February at 1:05PM
    Over the period used for the OP figures (26 years to Jan 2025), you've also got the initial dotcom boom/crash. So they say compound growth rate of 7.69% for 26 years, and average annualised return of 10.6% over 20 years (I think they mean the same thing by each term, but someone  correct me if they don't).

    If you invest regularly, you get pound cost averaging which mitigates the bad periods. For instance, I have F&C IT (a decent proxy for the global developed market) figures for similar periods (up to Feb 2024; so we'll use Feb 1998-Feb 2024, and Feb 2004-Feb 2004). If I just use the total return figures from the start and the end, I get 
    26 years annualised growth 8.7%
    20 years annualised growth 10.9%
    If I do a calculation of regular investing at the CPI amount (ie in Feb 1998 I invest £70.50; in Jan 2024 I invest £131.50), and use the XIRR function to get the effective rate, it is:
    26 years XIRR 10.1%
    20 years XIRR 11.2%
    You can see that simple "end price divided by start price" figure looks a bit worse, when a crash is involved; the XIRR figure is what a regular investor actually gets, and isn't affected so much by a crash (as long as the crash isn't at the end ...).

    So that is: if someone invested the equivalent of £131.50/month for 26 years to Feb 2024, they'd have £115,603. 
  • leosayer
    leosayer Posts: 636 Forumite
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    It's also worth saying that tax efficiency can in some cases significantly increase the effective returns you get from investing.

    For example, instead of investing via an ISA, salary sacrificing into a pension can mean you pay much less tax on your income.
  • SneakySpectator
    SneakySpectator Posts: 334 Forumite
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    edited 21 February at 1:41PM
    leosayer said:


    For example, instead of investing via an ISA, salary sacrificing into a pension can mean you pay much less tax on your income.
    True but this is incredibly risky as you're effectively locking that money away until 55, soon to be 57 and probably 60+ by the time I retire. Also you pay tax if you withdraw over a certain amount in 1 year or whatever.

    At least with a stocks and shares isa I have access anytime I need it and it's tax free anyway. 
  • VNX
    VNX Posts: 458 Forumite
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    leosayer said:


    For example, instead of investing via an ISA, salary sacrificing into a pension can mean you pay much less tax on your income.
    True but this is incredibly risky as you're effectively locking that money away until 55, soon to be 57 and probably 60+ by the time I retire. Also you pay tax if you withdraw over a certain amount in 1 year or whatever.

    At least with a stocks and shares isa I have access anytime I need it and it's tax free anyway. 
    Not sure I’d call a pension incredibly risky 
  • EthicsGradient
    EthicsGradient Posts: 1,264 Forumite
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    leosayer said:


    For example, instead of investing via an ISA, salary sacrificing into a pension can mean you pay much less tax on your income.
    True but this is incredibly risky as you're effectively locking that money away until 55, soon to be 57 and probably 60+ by the time I retire. Also you pay tax if you withdraw over a certain amount in 1 year or whatever.

    At least with a stocks and shares isa I have access anytime I need it and it's tax free anyway. 
    Few people think "investing for your pension" is "incredibly risky". It is, after all, the point of FIRE, which is what you're talking about. Investing over a long period is less risky than a short one. And you'll still come out ahead, as long as you withdraw less than your salary was when you contributed.
  • leosayer said:


    For example, instead of investing via an ISA, salary sacrificing into a pension can mean you pay much less tax on your income.
    True but this is incredibly risky as you're effectively locking that money away until 55, soon to be 57 and probably 60+ by the time I retire. Also you pay tax if you withdraw over a certain amount in 1 year or whatever.

    At least with a stocks and shares isa I have access anytime I need it and it's tax free anyway. 
    Few people think "investing for your pension" is "incredibly risky". It is, after all, the point of FIRE, which is what you're talking about. Investing over a long period is less risky than a short one. And you'll still come out ahead, as long as you withdraw less than your salary was when you contributed.
    I think you misunderstood what I meant. 

    Currently 95% of all the money I have is in a global index fund in a stocks and shares ISA. The other 5% is in an emergency cash isa account. I can withdraw from both at anytime without penalty and have the money in my bank account within 2 days. That to me screams safety. 

    However if 95% of my money was locked away in a private pension that I wasn't allowed to withdraw from until the age of 57+, that would give me huge anxiety because if I ever needed that money but couldn't access it I'd be screwed. Sure I'd have some money in my emergency cash isa account but if that run out I'd literally have no money. 

    Besides my company only matches my contribution up to 7.5% so if I contributed 20% they'd still only contribute 7.5%. Also I'm not a high earner so the tax I pay is the lowest amount anyway. 

    And like I said I can withdraw 100% of the isa without paying any tax but a pension you pay tax after the first 25% or whatever it is.  
  • Hoenir
    Hoenir Posts: 7,742 Forumite
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    edited 21 February at 2:25PM
    In November 2007 the US $ traded at $2.12 to the £. Investments that US $ denominated have benefited from anything up to a 40% tailwind as a result. Charts are all very well. What lies beneath needs to be understood. To provide context and avoid misassumptions that easily perpetuate into social media myths.
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