Is the real average global equity return only 4.87%?

OldScientist

Bostonerimus1 said:

Hoenir said:

* 40% UK equities, 40% US equities, 10% UK long maturity bonds, and 10% UK cash. Asset returns and inflation for 1872 onwards from macrohistory.net

With hindsight it's easy to say what people could/should have done.  Totally white washing Japan (for example) from Investment History fails to reflect reality. 

I think the point is to show the historical variability of returns rather than the effects of geographical asset allocation. But, yes, asset allocation is a factor in returns and if you happen to be Japanese and lived through the Lost Decade there will have been a lot of pain.

Yes, it was supposed to illustrative of the variability in outcomes - I even said "While the exact numbers will depend on the portfolio".

The effect of the Japanese stock market (it formed about 35% of the global market in 1987) on the world market in 1990 can be seen using the https://curvo.eu/backtest/en/market-index/msci-world?currency=usd where there was fall of 17% in that year. From an accumulator’s point of view, that would have been a positive (cheap equities!), so the detailed numbers would have changed slightly but not by a factor of six which is the difference between the best and worst cases (in other words, small changes in the construction of the portfolio will generally make small changes to the spread of outcomes).

A recent article by William Bernstein (https://www.advisorperspectives.com/articles/2025/02/10/merton-share-why-dont-use-retirement-calculators – scroll down to the section labelled ‘retirement calculators’ onwards for the most relevant parts) succinctly expresses a view that I can largely agree with.

For the OP, the table in the ‘start on the back of the envelope’ section of Bernstein's article illustrates an answer to your implicit question of how much should you save (for a shorter period of accumulation than 40 years, the monthly figures will be greater, real $ can be replaced by real £). Since the historical average returns of whatever index do not give much more than a vague indication of future returns, the practical answer is probably to save as much as you can for the future without making your present life miserable and review this every few years. I also note that https://tpawplanner.com (excel versions are available athttps://www.bogleheads.org/wiki/Total_portfolio_allocation_and_withdrawal) might be of interest.

Bostonerimus1

OldScientist said:

Bostonerimus1 said:

Hoenir said:

* 40% UK equities, 40% US equities, 10% UK long maturity bonds, and 10% UK cash. Asset returns and inflation for 1872 onwards from macrohistory.net

With hindsight it's easy to say what people could/should have done.  Totally white washing Japan (for example) from Investment History fails to reflect reality. 

I think the point is to show the historical variability of returns rather than the effects of geographical asset allocation. But, yes, asset allocation is a factor in returns and if you happen to be Japanese and lived through the Lost Decade there will have been a lot of pain.

Yes, it was supposed to illustrative of the variability in outcomes - I even said "While the exact numbers will depend on the portfolio".

The effect of the Japanese stock market (it formed about 35% of the global market in 1987) on the world market in 1990 can be seen using the https://curvo.eu/backtest/en/market-index/msci-world?currency=usd where there was fall of 17% in that year. From an accumulator’s point of view, that would have been a positive (cheap equities!), so the detailed numbers would have changed slightly but not by a factor of six which is the difference between the best and worst cases (in other words, small changes in the construction of the portfolio will generally make small changes to the spread of outcomes).

A recent article by William Bernstein (https://www.advisorperspectives.com/articles/2025/02/10/merton-share-why-dont-use-retirement-calculators – scroll down to the section labelled ‘retirement calculators’ onwards for the most relevant parts) succinctly expresses a view that I can largely agree with.

For the OP, the table in the ‘start on the back of the envelope’ section of Bernstein's article illustrates an answer to your implicit question of how much should you save (for a shorter period of accumulation than 40 years, the monthly figures will be greater, real $ can be replaced by real £). Since the historical average returns of whatever index do not give much more than a vague indication of future returns, the practical answer is probably to save as much as you can for the future without making your present life miserable and review this every few years. I also note that https://tpawplanner.com (excel versions are available athttps://www.bogleheads.org/wiki/Total_portfolio_allocation_and_withdrawal) might be of interest.

That's a nice article by Bernstein and aligns with my Zen approach to investing along with a large helping of "que sera sera". Retirement is suppose to be a time to relax and enjoy the profits of a life well lived, but it can become a time of intense stress if you are managing DC drawdown. That's one of the negatives of DC drawdown, at least with a DB pension or annuity there's no worry about the next income cheque.

As a physical scientist I always want to calculate things precisely, as far as possible, but thankfully I also spent a long time in biological research where the modeling and the answers are far less certain. After running all the simulations and reading extensively I decided to use DB pensions, SPs, and rental income to cover my retirement costs, greatly reducing chance in that equation - it's my equivalent of a TIPS strategy. I use a rising equity glide path for my DC pensions and investments in an effort to maximize any inheritance.

phlebas192

OldScientist said:

A recent article by William Bernstein (https://www.advisorperspectives.com/articles/2025/02/10/merton-share-why-dont-use-retirement-calculators – scroll down to the section labelled ‘retirement calculators’ onwards for the most relevant parts) succinctly expresses a view that I can largely agree with.

That's a good article. It always amused / horrified me that people used the US returns for FIRE calculations without considering the survivorship bias inherent in doing so. From https://en.wikipedia.org/wiki/List_of_regions_by_past_GDP_(PPP) the top countries by GDP in 1913 were USA, China, Germany & Russia. With two of those you would have lost absolutely everything investing in their markets in 1913 over a 40 year period and another would have done so if the Allies had been harsher in 1945 (and in the meantime suffering horribly from hyper-inflation). So why assume that the single survivor is a good guide for the next 40 years?

Bostonerimus1

phlebas192 said:

OldScientist said:

A recent article by William Bernstein (https://www.advisorperspectives.com/articles/2025/02/10/merton-share-why-dont-use-retirement-calculators – scroll down to the section labelled ‘retirement calculators’ onwards for the most relevant parts) succinctly expresses a view that I can largely agree with.

That's a good article. It always amused / horrified me that people used the US returns for FIRE calculations without considering the survivorship bias inherent in doing so. From https://en.wikipedia.org/wiki/List_of_regions_by_past_GDP_(PPP) the top countries by GDP in 1913 were USA, China, Germany & Russia. With two of those you would have lost absolutely everything investing in their markets in 1913 over a 40 year period and another would have done so if the Allies had been harsher in 1945 (and in the meantime suffering horribly from hyper-inflation). So why assume that the single survivor is a good guide for the next 40 years?

There are still some financial advisors (in the US where I live) who take a very conservative approach to retirement investing. It's definitely not a popular approach, but someone like Zvi Bodie advocates the use of TIPS and I-Bonds - I Bonds are similar to NS&I products. There are also annuity type products available to US Government and academic workers that give you a guaranteed annual return on your money with the idea that after 30 or 40 years you'll buy a lifetime annuity. Of course this all assumes that the US remains stable and solvent...???

Hoenir

Bostonerimus1 said:

Hoenir said:

* 40% UK equities, 40% US equities, 10% UK long maturity bonds, and 10% UK cash. Asset returns and inflation for 1872 onwards from macrohistory.net

With hindsight it's easy to say what people could/should have done.  Totally white washing Japan (for example) from Investment History fails to reflect reality. 

I think the point is to show the historical variability of returns rather than the effects of geographical asset allocation. But, yes, asset allocation is a factor in returns and if you happen to be Japanese and lived through the Lost Decade there will have been a lot of pain.

History is littered with other examples. WW2  transformed many economies for better and for worse. The only certainty when investing is the uncertainty of what the future holds. There's a high degree of luck involved irrespective of any skills one might possess as an investor. 

Bostonerimus1

Hoenir said:

Bostonerimus1 said:

Hoenir said:

* 40% UK equities, 40% US equities, 10% UK long maturity bonds, and 10% UK cash. Asset returns and inflation for 1872 onwards from macrohistory.net

With hindsight it's easy to say what people could/should have done.  Totally white washing Japan (for example) from Investment History fails to reflect reality. 

I think the point is to show the historical variability of returns rather than the effects of geographical asset allocation. But, yes, asset allocation is a factor in returns and if you happen to be Japanese and lived through the Lost Decade there will have been a lot of pain.

History is littered with other examples. WW2  transformed many economies for better and for worse. The only certainty when investing is the uncertainty of what the future holds. There's a high degree of luck involved irrespective of any skills one might possess as an investor. 

Yes there are many variables and an almost infinite number of potential outcomes. This is why I decided to go for the guaranteed gains of low fees and to take the variable of my self out of my investing as much as possible by following a low cost passive indexing approach. As Bernstein points out in the article that OldScientist shared, there is little specific utility of any retirement model, but they do give some insights into the issues. So be frugal, do the best you can and stress test your plans as they can easily be overcome by reality.

Malthusian

Bostonerimus1 said:

There are still some financial advisors (in the US where I live) who take a very conservative approach to retirement investing. It's definitely not a popular approach, but someone like Zvi Bodie advocates the use of TIPS and I-Bonds - I Bonds are similar to NS&I products. 

So inflation-linked gilts and NS&I inflation linked bonds, in the language of UK investors. NS&I index-linked certificates / I-bonds are of course a no-brainer, but the amount you can put in them in the USA is restricted. (And over here, of course, they're not available at all and haven't been for donkeys' years.)

The other 10% he recommends putting in S&P 500 call options, so basically equities but more complicated and not as good. (For the purpose we are talking about here, which is long term growth.)

This is the kind of approach you would expect from someone who works at a university and not at a regulated financial planner with liability for their advice. (Bodie is an academic and not a financial adviser.)

According to the brief summary of Bodie's work I read, he also advocates taking a flexible approach to retirement and being willing to delay it if your plans don't work out. Now that definitely is good advice, especially if you intend to hold almost all of your long-term investments in gilts.

Bostonerimus1

Malthusian said:

Bostonerimus1 said:

There are still some financial advisors (in the US where I live) who take a very conservative approach to retirement investing. It's definitely not a popular approach, but someone like Zvi Bodie advocates the use of TIPS and I-Bonds - I Bonds are similar to NS&I products. 

So inflation-linked gilts and NS&I inflation linked bonds, in the language of UK investors. NS&I index-linked certificates / I-bonds are of course a no-brainer, but the amount you can put in them in the USA is restricted. (And over here, of course, they're not available at all and haven't been for donkeys' years.)

The other 10% he recommends putting in S&P 500 call options, so basically equities but more complicated and not as good. (For the purpose we are talking about here, which is long term growth.)

This is the kind of approach you would expect from someone who works at a university and not at a regulated financial planner with liability for their advice. (Bodie is an academic and not a financial adviser.)

According to the brief summary of Bodie's work I read, he also advocates taking a flexible approach to retirement and being willing to delay it if your plans don't work out. Now that definitely is good advice, especially if you intend to hold almost all of your long-term investments in gilts.

He's definitely a contrarian and a hold over from the time before DC pensions.

To perhaps an even greater extent than in the UK, the US has adopted a risky approach to retirement investing using the principals of "efficient frontiers" and as you might expect there has been a range of outcomes. The fact that some people have done well and others have lost money could be seen as a failure of the approach if we want everyone to have sufficient retirement income. The silver lining in the US is the relatively large size of it's equivalent of SP, but the landscape of other benefits for the old and poor really depends on where you live. If you're in New England you'll have access to a good range of benefits, not so much if you are in Louisiana.

Bodie has worked outside of academia at TIAA-CREF and promotes his approach with his consultancy and in the media, but he's pretty much a lone voice. His approach probably gets most currency with Government and University employees who have easy access to I-Bonds and conservative investing products like TIAA-Traditional annuity. Funnily enough these employees are some of the few in the US who still also get DB pensions. 

OldScientist

Bodie's book "Risk less and prosper" which was written in the wake of the GFC, is essentially a manifesto for 'floor and upside' which is, at least for some of us here, the approach we've taken to retirement planning and implementation. Some of the content of the book is a bit overcomplicated for my tastes, but I think it was written with advisors in mind.

Essentially, 'floor and upside'
1) Build a floor of inflation linked income (SP, DB pensions, annuities, and collapsing ILG ladders) that matches or exceeds your 'core' expenditure (i.e., the expenditure that supports your minimum acceptable lifestyle). Vaguely relevant to the OP, Bodie suggests building a floor of TIPS (i.e., ILG) over the last 20 years or so of the accumulation phase (which is effectively derisking retirement income). Of course, extreme risks (DB pension failure, government default, etc.) can still affect the flooring.
2) Use the risky portfolio to support discretionary expenditure which most retirees will be 'happy' to see vary from one year to the next.

Bostonerimus1

OldScientist said:

Bodie's book "Risk less and prosper" which was written in the wake of the GFC, is essentially a manifesto for 'floor and upside' which is, at least for some of us here, the approach we've taken to retirement planning and implementation. Some of the content of the book is a bit overcomplicated for my tastes, but I think it was written with advisors in mind.

Essentially, 'floor and upside'
1) Build a floor of inflation linked income (SP, DB pensions, annuities, and collapsing ILG ladders) that matches or exceeds your 'core' expenditure (i.e., the expenditure that supports your minimum acceptable lifestyle). Vaguely relevant to the OP, Bodie suggests building a floor of TIPS (i.e., ILG) over the last 20 years or so of the accumulation phase (which is effectively derisking retirement income). Of course, extreme risks (DB pension failure, government default, etc.) can still affect the flooring.
2) Use the risky portfolio to support discretionary expenditure which most retirees will be 'happy' to see vary from one year to the next.

Bodie and Bogle have greatly influenced my thinking. There was a brief re-evaluation of investment philosophies after the GFC, but that seems to have been mostly forgotten now. It's sort of ironic that when everyone had a DB pension, and before the reforms brought about because of Maxwell, DB pension funds would actually take quite a bit of risk in their investments and workers got the benefit while being insulated from that risk. Now DB pensions are all about liability matching and gilts and individuals with DC plans are directly exposed to risk with equity heavy portfolios. That hasn't happened in the US - my DB pension is backed by the State I live in and  invested aggressively for long term growth.