digest
Short Summary
Main recommendation: Do not assume stocks will return 10% or more per year on average; a more realistic expectation for planning is roughly a 7% nominal (about 4.6% real) return, net of fees around 7.08% nominal for a total market index portfolio according to PWL Capital's method. The 10% figure comes mainly from recent US market history, which was boosted by rising valuations and US good luck, so it is likely too optimistic for future expectations. Stocks still outperform bonds in the long-term data, so the point is about expected size of returns, not avoiding stocks.
Key Points
- The commonly quoted 10% figure comes from US stock returns since 1950 (11.32% nominal annualized through 2023, 9.81% over the last 20 years), which were strongly helped by rising valuations.
- Nominal returns overstate what investors actually gain; real (inflation-adjusted) returns are the relevant measure, with US stocks at 7.63% real from 1950 to 2023 (7.16% for the last 20 years) and 5.57% real from 1900 to 1950.
- Fama and French's 2002 research suggested the post-1951 US premium was largely unexpected and driven by falling discount rates, which should not be counted on going forward.
- Survivorship and "good luck," combined with rising valuations, explain roughly 2% of the historical US equity risk premium from 1920 to March 2020; after removing this, the real US return is about 5.28%.
- Global stock returns are lower than US returns: about 4.35% real excluding the US and 5.16% including it from 1900 to 2023, and research across 38 developed markets found median real returns of 5.28% for international and 4.78% for domestic stocks.
Details Worth Noting
- Concrete instructions: No step-by-step investing instructions were given. The actionable guidance is to use realistic expected return assumptions in planning rather than 10% (roughly 7% nominal or about 4.6% real before fees), to start from global historical returns, remove the valuation effect, and then adjust for current valuations, as PWL does. Planning inputs should also account for fund fees, since PWL's total market index figure drops from 7.24% nominal before fees to 7.08% net.
- Valuations matter: the speaker says US valuations were at the 97th percentile of expensiveness relative to history at the time, a condition associated with lower future returns.
- Small differences compound: the gap between 10% and 7% expected returns can significantly change how much to save for retirement, how much can be spent in retirement, and when retirement is possible.
- The speaker notes that 1900 to 1950 US real returns of 5.57% and the 1920 to 2020 adjusted figure of 5.28% are both closer to the global estimates than the post-1950 US record.
- PWL Capital updates these expected return estimates twice a year and publishes them on its website for free.
Bottom Line
Plan with expected stock returns closer to 7% nominal (net of fees, about 7.08% for PWL's index portfolio example) rather than 10%, while still expecting stocks to beat bonds over the long run.
