What's the actual all world long term average?

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alex123711
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What's the actual all world long term average?

Post by alex123711 »

Seems to be hard to find a consistent number, or people only give figures for the U.S market etc. What's the actual long term average of the total world?
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Re: What's the actual all world long term average?

Post by firebirdparts »

Don't know, but the answer might be here:
The Rate of Return on Everything
Lots of answers to the question in this paper. Like a room with 4 clocks in it.
This time is the same
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Re: What's the actual all world long term average?

Post by jarjarM »

firebirdparts wrote: Tue Oct 19, 2021 8:13 pm Don't know, but the answer might be here:
The Rate of Return on Everything
Lots of answers to the question in this paper. Like a room with 4 clocks in it.
Page 15 is the table you're looking for
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Re: What's the actual all world long term average?

Post by nisiprius »

According to the Credit Suisse Global Investment Returns Yearbook 2018, Summary Edition, by Elroy Dimson & al, the real return (inflation adjusted and dividends reinvested) for the whole world, 1900-2017, has been 5.2%.

Image

Compared with 6.5% for the United States.
Last edited by nisiprius on Tue Oct 19, 2021 8:55 pm, edited 1 time in total.
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Re: What's the actual all world long term average?

Post by jarjarM »

nisiprius wrote: Tue Oct 19, 2021 8:24 pm According to the Credit Suisse Global Investment Returns Yearbook 2018, Summary Edition, by Elroy Dimson & al, the real return (inflation adjusted and dividends reinvested) for the whole world, 1900-2017, has been 4.3%. (Compared to 5.6% for the USA).
Slightly updated for 2021 yearbook
Equities still remain the best long-run financial investment ahead of bonds and bills. Over the last 121 years, global equities have provided an annualized real USD return of 5.3% versus 2.1% for bonds and 0.8% for bills.
Source
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Re: What's the actual all world long term average?

Post by nisiprius »

Dumb mistake, description here removed and original posting above corrected.
Last edited by nisiprius on Tue Oct 19, 2021 8:53 pm, edited 1 time in total.
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Re: What's the actual all world long term average?

Post by JoMoney »

nisiprius wrote: Tue Oct 19, 2021 8:30 pm...

I wonder what I'm missing.
Credit Suisse Global Investment Returns Yearbook 2018 wrote:the risk premium on the world equity index was 4.3%.

https://www.credit-suisse.com/media/ass ... y-2018.pdf
I don't think "the risk premium" is the total return, it's the return over the return of some risk-free asset like T-bills.
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Re: What's the actual all world long term average?

Post by nisiprius »

JoMoney wrote: Tue Oct 19, 2021 8:46 pm
nisiprius wrote: Tue Oct 19, 2021 8:30 pm...

I wonder what I'm missing.
Credit Suisse Global Investment Returns Yearbook 2018 wrote:the risk premium on the world equity index was 4.3%.

https://www.credit-suisse.com/media/ass ... y-2018.pdf
I don't think "the risk premium" is the total return, it's the return over the return of some risk-free asset like T-bills.
:oops: Fixed.
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Re: What's the actual all world long term average?

Post by jarjarM »

nisiprius wrote: Tue Oct 19, 2021 8:30 pm
jarjarM wrote: Tue Oct 19, 2021 8:27 pm
nisiprius wrote: Tue Oct 19, 2021 8:24 pm According to the Credit Suisse Global Investment Returns Yearbook 2018, Summary Edition, by Elroy Dimson & al, the real return (inflation adjusted and dividends reinvested) for the whole world, 1900-2017, has been 4.3%. (Compared to 5.6% for the USA).
Slightly updated for 2021 yearbook
Equities still remain the best long-run financial investment ahead of bonds and bills. Over the last 121 years, global equities have provided an annualized real USD return of 5.3% versus 2.1% for bonds and 0.8% for bills.
Source
Wow. Big difference. 4.3% 1900-2017 versus 5.3% 1900-2020. That's... almost hard to believe.

1.043^118 = 143.73
1.053^121 = 517.41

That seems to imply that an investment in global equities would have multiplied by 3.60X in four years, which in turn implies a an average real rate of return (CAGR) of 53.26%/year for three-year period 2018, 2019, and 2020. That... doesn't seem right to me.

PortfolioVisualizer is only showing an average of 10.09%/year for those three years.

I wonder what I'm missing.
Yeah, that seems quite a big jump too. I wonder if credit suisse refreshed their data source and hence the difference??? Time to read the fine prints a bit.
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Re: What's the actual all world long term average?

Post by pizzy »

nisiprius wrote: Tue Oct 19, 2021 8:30 pm Dumb mistake, description here removed and original posting above corrected.
The right numbers to compare are 4.3% in 2018 and 4.4% in 2021. These are the risk premium numbers.
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Re: What's the actual all world long term average?

Post by nisiprius »

pizzy wrote: Tue Oct 19, 2021 8:54 pm
nisiprius wrote: Tue Oct 19, 2021 8:30 pm Dumb mistake, description here removed and original posting above corrected.
The right numbers to compare are 4.3% in 2018 and 4.4% in 2021. These are the risk premium numbers.
Or 5.2% in 2018 and 5.3% in 2021, which are the real return numbers.
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Re: What's the actual all world long term average?

Post by pizzy »

nisiprius wrote: Tue Oct 19, 2021 8:56 pm
pizzy wrote: Tue Oct 19, 2021 8:54 pm
nisiprius wrote: Tue Oct 19, 2021 8:30 pm Dumb mistake, description here removed and original posting above corrected.
The right numbers to compare are 4.3% in 2018 and 4.4% in 2021. These are the risk premium numbers.
Or 5.2% in 2018 and 5.3% in 2021, which are the real return numbers.
Problem solved.
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Re: What's the actual all world long term average?

Post by jarjarM »

pizzy wrote: Tue Oct 19, 2021 8:57 pm
nisiprius wrote: Tue Oct 19, 2021 8:56 pm
pizzy wrote: Tue Oct 19, 2021 8:54 pm
nisiprius wrote: Tue Oct 19, 2021 8:30 pm Dumb mistake, description here removed and original posting above corrected.
The right numbers to compare are 4.3% in 2018 and 4.4% in 2021. These are the risk premium numbers.
Or 5.2% in 2018 and 5.3% in 2021, which are the real return numbers.
Problem solved.
That's why we all post so others can correct our mistakes :beer But seriously though, still a big jump in equity return in the last 3 years to have a 121 yr CAGR go up by 0.1%.
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Re: What's the actual all world long term average?

Post by pizzy »

jarjarM wrote: Tue Oct 19, 2021 9:15 pm
pizzy wrote: Tue Oct 19, 2021 8:57 pm
nisiprius wrote: Tue Oct 19, 2021 8:56 pm
pizzy wrote: Tue Oct 19, 2021 8:54 pm
nisiprius wrote: Tue Oct 19, 2021 8:30 pm Dumb mistake, description here removed and original posting above corrected.
The right numbers to compare are 4.3% in 2018 and 4.4% in 2021. These are the risk premium numbers.
Or 5.2% in 2018 and 5.3% in 2021, which are the real return numbers.
Problem solved.
That's why we all post so others can correct our mistakes :beer But seriously though, still a big jump in equity return in the last 3 years to have a 121 yr CAGR go up by 0.1%.
It’s been a good run. :sharebeer
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Re: What's the actual all world long term average?

Post by jarjarM »

pizzy wrote: Tue Oct 19, 2021 9:20 pm It’s been a good run. :sharebeer
Yup :sharebeer
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Re: What's the actual all world long term average?

Post by alex123711 »

nisiprius wrote: Tue Oct 19, 2021 8:24 pm According to the Credit Suisse Global Investment Returns Yearbook 2018, Summary Edition, by Elroy Dimson & al, the real return (inflation adjusted and dividends reinvested) for the whole world, 1900-2017, has been 5.2%.

Image

Compared with 6.5% for the United States.
Thats quite low, basically only double your money twice in a 30 year period. Especially since most fire calculators seem to use a much higher figure? More recent and US only figures perhaps.
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Re: What's the actual all world long term average?

Post by strakert »

alex123711 wrote: Tue Oct 19, 2021 11:13 pm
nisiprius wrote: Tue Oct 19, 2021 8:24 pm According to the Credit Suisse Global Investment Returns Yearbook 2018, Summary Edition, by Elroy Dimson & al, the real return (inflation adjusted and dividends reinvested) for the whole world, 1900-2017, has been 5.2%.

Image

Compared with 6.5% for the United States.
Thats quite low, basically only double your money twice in a 30 year period. Especially since most fire calculators seem to use a much higher figure? More recent and US only figures perhaps.
The 120 year period in question includes 2 world wars, 2 communist revolutions, dissolution of the once invincible British empire, markets for multiple developed nations collapsing due to hyperinflation, a cold war, 2 global pandemics, a worldwide great depression and a near-meltdown of global financial system.

All said and done, 5.2% is pretty amazing!
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Re: What's the actual all world long term average?

Post by Valuethinker »

alex123711 wrote: Tue Oct 19, 2021 11:13 pm
nisiprius wrote: Tue Oct 19, 2021 8:24 pm According to the Credit Suisse Global Investment Returns Yearbook 2018, Summary Edition, by Elroy Dimson & al, the real return (inflation adjusted and dividends reinvested) for the whole world, 1900-2017, has been 5.2%.

Image

Compared with 6.5% for the United States.
Thats quite low, basically only double your money twice in a 30 year period. Especially since most fire calculators seem to use a much higher figure? More recent and US only figures perhaps.
"Aye. There's the rub" (misquoting Shakespeare)

Is the US unique or just going through a period of outperformance?

Is recent US performance a good guide to future performance?

Are people feeding garbage inputs into their FIRE calculators? Unrealistically high values?
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Re: What's the actual all world long term average?

Post by Valuethinker »

strakert wrote: Tue Oct 19, 2021 11:21 pm
alex123711 wrote: Tue Oct 19, 2021 11:13 pm
nisiprius wrote: Tue Oct 19, 2021 8:24 pm According to the Credit Suisse Global Investment Returns Yearbook 2018, Summary Edition, by Elroy Dimson & al, the real return (inflation adjusted and dividends reinvested) for the whole world, 1900-2017, has been 5.2%.

Image

Compared with 6.5% for the United States.
Thats quite low, basically only double your money twice in a 30 year period. Especially since most fire calculators seem to use a much higher figure? More recent and US only figures perhaps.
The 120 year period in question includes 2 world wars, 2 communist revolutions, dissolution of the once invincible British empire, markets for multiple developed nations collapsing due to hyperinflation, a cold war, 2 global pandemics, a worldwide great depression and a near-meltdown of global financial system.

All said and done, 5.2% is pretty amazing!
Wait. You forgot 2 oil crises. Innumerable financial crashes. Nuclear confrontation at least once verging on total destruction (you could make the case for perhaps 4 cases**, I think, plus the very real possibility of a Russian-Chinese nuclear exchange in 1969 which is not one most of us think about). Resignation of a US president under threat of impeachment in 1974. Stagflation in the 1970s.

It's the risk, and the volatility, that is why the return is so high. Equities are very risky - in fact stock prices appear to be fractal in pattern (scale invariant).

It's that high risk, and the possibility of complete collapse, that means that investors award equity those high returns. Investors are being paid to take a *lot* of risk.

I think this is the basic point that Taleb is making. He credits it to Mandelbrot. And Mandelbrot found someone even earlier (19th C?) who had made this point.

There's also the Hyman Minsky point, that periods of extreme stability lead to adaptive behaviour which increases the volatility when it does come.

** 1949 Berlin Airlift. 1961 Checkpoint Charlie & Berlin Wall. 1973 Arab-Israeli war. 1983 Exercise Able Archer was probably the closest + Cuban Missile Crisis which is one we all know about.
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Re: What's the actual all world long term average?

Post by nisiprius »

Valuethinker wrote: Wed Oct 20, 2021 9:50 am...There's also the Hyman Minsky point, that periods of extreme stability lead to adaptive behaviour which increases the volatility when it does come...
To me, one of the more concerning "signs of a top" in the forum was the recent query, What is swr if you remove worst sequences?
Does anyone know what the safe withdrawal rate would be for 30-50 yr retirement if you remove the worst sequences, say the bottom 10%? This is if you don’t believe the Great Depression can occur again or the high inflation of the 70s? It seems like most here aim for 3-4%, but that assumes the worst.
The usual debate is whether assuming the worst case that has actually occurred is too optimistic, keeping in mind Taleb's observation that by definition the "worst case" is always something that had never occurred before in history.

Quite seriously I've been struck by the number of discussions that implicitly (or explicitly) assume that the Great Depression shouldn't count, because it was a really long time ago. I think a fair number of younger people feel that way about 2008-2009.
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Re: What's the actual all world long term average?

Post by strakert »

nisiprius wrote: Wed Oct 20, 2021 10:18 am
Valuethinker wrote: Wed Oct 20, 2021 9:50 am...There's also the Hyman Minsky point, that periods of extreme stability lead to adaptive behaviour which increases the volatility when it does come...
To me, one of the more concerning "signs of a top" in the forum was the recent query, What is swr if you remove worst sequences?
Does anyone know what the safe withdrawal rate would be for 30-50 yr retirement if you remove the worst sequences, say the bottom 10%? This is if you don’t believe the Great Depression can occur again or the high inflation of the 70s? It seems like most here aim for 3-4%, but that assumes the worst.
The usual debate is whether assuming the worst case that has actually occurred is too optimistic, keeping in mind Taleb's observation that by definition the "worst case" is always something that had never occurred before in history.

Quite seriously I've been struck by the number of discussions that implicitly (or explicitly) assume that the Great Depression shouldn't count, because it was a really long time ago. I think a fair number of younger people feel that way about 2008-2009.
I think people also systematically underestimate just how risky some of these events truly were, due to them having worked out alright in the end and historians providing plausible sounding post-facto explanations/justifications/rationalizations.

At the time, it was nowhere close to a sure thing that the the world economies would survive the Great Depression. That Germany wouldn't be able to steamroll the Soviet Union in WW2. That there wouldn't be all out nuclear annihilation during the Cold War. That the banking, insurance and real estate systems wouldn't collapse due to the mortgage meltdown. That the coronavirus wouldn't be a lot more deadly than it was. It took extraordinary measures and incredible luck to shift all of these events towards the favorable outcomes, and even then the results weren't certain.

Next time will be different, and the outcome is not guaranteed to be favorable, and that's why it's good to diversify. Not because of what mean variance optimizers based on historical returns and their volatilities say.
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Re: What's the actual all world long term average?

Post by secondopinion »

strakert wrote: Wed Oct 20, 2021 2:08 pm Next time will be different, and the outcome is not guaranteed to be favorable, and that's why it's good to diversify. Not because of what mean variance optimizers based on historical returns and their volatilities say.
Next time might not be different; we really do not know. But yes, do diversify and do figure for risk skew.
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Re: What's the actual all world long term average?

Post by strakert »

secondopinion wrote: Wed Oct 20, 2021 2:13 pm
strakert wrote: Wed Oct 20, 2021 2:08 pm Next time will be different, and the outcome is not guaranteed to be favorable, and that's why it's good to diversify. Not because of what mean variance optimizers based on historical returns and their volatilities say.
Next time might not be different; we really do not know. But yes, do diversify and do figure for risk skew.
Thanks for calling out the nuance.

Not every time the media says "this time is different" will be different. In fact, most of the time it will just be noise. That's why you ignore it and stay the course.

But when the "worst case" does appear, it will be different, it will be worse and a favorable outcome will not be a sure thing. This is because "by definition the "worst case" is always something that had never occurred before in history." Will this happen in our lifetimes? Nobody knows. Certainly volatility, skew, kurtosis of extremely limited market data will not let you predict this. Certainly humanity hasn't yet conquered risk. That's why you diversify.
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Re: What's the actual all world long term average?

Post by hoops777 »

Valuethinker wrote: Wed Oct 20, 2021 9:45 am
alex123711 wrote: Tue Oct 19, 2021 11:13 pm
nisiprius wrote: Tue Oct 19, 2021 8:24 pm According to the Credit Suisse Global Investment Returns Yearbook 2018, Summary Edition, by Elroy Dimson & al, the real return (inflation adjusted and dividends reinvested) for the whole world, 1900-2017, has been 5.2%.

Image

Compared with 6.5% for the United States.
Thats quite low, basically only double your money twice in a 30 year period. Especially since most fire calculators seem to use a much higher figure? More recent and US only figures perhaps.
"Aye. There's the rub" (misquoting Shakespeare)

Is the US unique or just going through a period of outperformance?

Is recent US performance a good guide to future performance?

Are people feeding garbage inputs into their FIRE calculators? Unrealistically high values?
Of course the US is unique.
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Re: What's the actual all world long term average?

Post by McQ »

alex123711 wrote: Tue Oct 19, 2021 11:13 pm
nisiprius wrote: Tue Oct 19, 2021 8:24 pm According to the Credit Suisse Global Investment Returns Yearbook 2018, Summary Edition, by Elroy Dimson & al, the real return (inflation adjusted and dividends reinvested) for the whole world, 1900-2017, has been 5.2%.

Image

Compared with 6.5% for the United States.
Thats quite low, basically only double your money twice in a 30 year period. Especially since most fire calculators seem to use a much higher figure? More recent and US only figures perhaps.
A note of clarification about the Credit Suisse data

The chart is for the "World." Dimson et al. mean that literally: the whole world, including the US, which on average has had about half of world capitalization.

You may have been asking about "international" returns, which Dimson et al. label as "World ex-USA." Its real equity return was only 4.4%.

Or as they note on p. 18 of the full 2021 yearbook [paraphrased]: A dollar invested in US equities in 1900 produced $2291 in purchasing power by 2020; in the rest of the world, only $207, less than a tenth of the US value.
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Re: What's the actual all world long term average?

Post by alex_686 »

JoMoney wrote: Tue Oct 19, 2021 8:46 pm I don't think "the risk premium" is the total return, it's the return over the return of some risk-free asset like T-bills.
!0 year Treasury. Or maybe 8 year.

You want to compare apples to apples. Stocks are long term holdings so you want to compare it another long term risk free holding. Comparing the return to a cash return does not make any sense.

The default from my prospective is 10 years. Academic text books, basic ERP models, and the like. I have seen academic papers and practitioners saying the current value should be around 8 years. The number is a bit soft because you are inferring what people consider to be comparable long term periods. But it is some long term value, not short term cash.
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Re: What's the actual all world long term average?

Post by alex123711 »

Valuethinker wrote: Wed Oct 20, 2021 9:50 am
strakert wrote: Tue Oct 19, 2021 11:21 pm
alex123711 wrote: Tue Oct 19, 2021 11:13 pm
nisiprius wrote: Tue Oct 19, 2021 8:24 pm According to the Credit Suisse Global Investment Returns Yearbook 2018, Summary Edition, by Elroy Dimson & al, the real return (inflation adjusted and dividends reinvested) for the whole world, 1900-2017, has been 5.2%.

Image

Compared with 6.5% for the United States.
Thats quite low, basically only double your money twice in a 30 year period. Especially since most fire calculators seem to use a much higher figure? More recent and US only figures perhaps.
The 120 year period in question includes 2 world wars, 2 communist revolutions, dissolution of the once invincible British empire, markets for multiple developed nations collapsing due to hyperinflation, a cold war, 2 global pandemics, a worldwide great depression and a near-meltdown of global financial system.

All said and done, 5.2% is pretty amazing!
Wait. You forgot 2 oil crises. Innumerable financial crashes. Nuclear confrontation at least once verging on total destruction (you could make the case for perhaps 4 cases**, I think, plus the very real possibility of a Russian-Chinese nuclear exchange in 1969 which is not one most of us think about). Resignation of a US president under threat of impeachment in 1974. Stagflation in the 1970s.

It's the risk, and the volatility, that is why the return is so high. Equities are very risky - in fact stock prices appear to be fractal in pattern (scale invariant).

It's that high risk, and the possibility of complete collapse, that means that investors award equity those high returns. Investors are being paid to take a *lot* of risk.

I think this is the basic point that Taleb is making. He credits it to Mandelbrot. And Mandelbrot found someone even earlier (19th C?) who had made this point.

There's also the Hyman Minsky point, that periods of extreme stability lead to adaptive behaviour which increases the volatility when it does come.

** 1949 Berlin Airlift. 1961 Checkpoint Charlie & Berlin Wall. 1973 Arab-Israeli war. 1983 Exercise Able Archer was probably the closest + Cuban Missile Crisis which is one we all know about.
I'd argue nuclear confrontation is more likely than ever, and the weapons would cause far more damage now than then. Also I'm surprised Covid had as little impact as it did, covid to me seems worse than what happened in 2008, even though there are now vaccines etc, whole industries shut down for over a year and are in more debt than ever (apart from tech) many will not survive
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Re: What's the actual all world long term average?

Post by secondopinion »

McQ wrote: Wed Oct 20, 2021 3:26 pm
alex123711 wrote: Tue Oct 19, 2021 11:13 pm
nisiprius wrote: Tue Oct 19, 2021 8:24 pm According to the Credit Suisse Global Investment Returns Yearbook 2018, Summary Edition, by Elroy Dimson & al, the real return (inflation adjusted and dividends reinvested) for the whole world, 1900-2017, has been 5.2%.

Image

Compared with 6.5% for the United States.
Thats quite low, basically only double your money twice in a 30 year period. Especially since most fire calculators seem to use a much higher figure? More recent and US only figures perhaps.
A note of clarification about the Credit Suisse data

The chart is for the "World." Dimson et al. mean that literally: the whole world, including the US, which on average has had about half of world capitalization.

You may have been asking about "international" returns, which Dimson et al. label as "World ex-USA." Its real equity return was only 4.4%.

Or as they note on p. 18 of the full 2021 yearbook [paraphrased]: A dollar invested in US equities in 1900 produced $2291 in purchasing power by 2020; in the rest of the world, only $207, less than a tenth of the US value.
The power of compounding. Of course, is 4.4% real returns that awful? I figure for 3-4% in my calculations for stocks. It is a little bit of survivorship bias, however, to make the US versus international comparison and make any major conclusions.
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Re: What's the actual all world long term average?

Post by bobcat2 »

There are a few caveats in the market return data Nisi has quoted.

There is some survivorship bias in the global data in that some countries' stock markets failed and are not included. Some examples are Poland, Argentina, Egypt, and Turkey. (Somewhat surprisingly in the early 20th century Egypt was the darling emerging stock market.) These markets individually were relatively small, but in the aggregate they would probably reduce the global stock market return by about 20 basis points were they included.

All the data are ignoring investment expenses and taxes. Over the last 120 years taking investment expenses and taxes into account would probably have resulted in lowering the real after tax equity returns of an American Methuselah by about 2%. For most of the 20th century investing in equities was much more expensive than it is today. So, our American Methuselah investing in the global stock market since 1900 would likely have achieved about a 3% real after-tax return on his global equity portfolio.

All the global returns are denominated in US dollars. This is accurate for US investors but not for foreign investors who are invested in their domestic currencies and not US dollars. For the most part non-US investors returns are within 30 basis points in either direction of before-tax US global returns. However, over the last 100 years the US has been by far the biggest equity market. So foreigners investing in the same global equity portfolio would have been subject to somewhat higher return volatility because of greater exposure to currency fluctuations (and thereby on average very slightly lower returns) when holding the global equity portfolio.

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Re: What's the actual all world long term average?

Post by McQ »

bobcat2 wrote: Thu Oct 21, 2021 2:08 pm There are a few caveats in the market return data Nisi has quoted.

There is some survivorship bias in the global data in that some countries' stock markets failed and are not included. Some examples are Poland, Argentina, Egypt, and Turkey. (Somewhat surprisingly in the early 20th century Egypt was the darling emerging stock market.) These markets individually were relatively small, but in the aggregate they would probably reduce the global stock market return by about 20 basis points were they included.

...
Hello Bobcat2: I would like to challenge your judgment that survivorship bias in the Dimson data is on the order of 20 basis points.

First, an apology to the thread: I had the correct dollar wealth amounts from the 2021 Credit Suisse yearbook in my post, but used an older annualized return. Should be 4.5% real for World ex-USA and 6.6% for US.

The annualized return of .045, added to 1, and raised to the 121st power, gives the dollar wealth of $207, from $1 invested at the beginning of 1900 and harvested 121 years later at the end of 2020. Could that return be 20 basis points too high? I think not.

Here is the reasoning. Let Egypt et al. be 5% of world capitalization. Let them all go to zero in one year, -100%. So, that year 95% of the world returns 4.5%, and 5% returns -100%; the total world return (ex-USA) is -0.50% that year.

Let that be the 121st year. So, 1.045 to the 120th power =196.77; X 0.995 in the 121st year = 195.78. The 121st root would be 1.0445766. The effect of survivorship bias would be 4.23 basis points, not 20.

Were Egypt et al. even five percent of world capitalization in their heyday? Seems unlikely. The Dimson research already includes Russia, at 6% of world cap, going to zero in 2017; and China at ?% going to zero in 1949. If so, 4 basis points is the max; it could be only 2 bp for neglecting / omitting Egypt et al.

You’ve been doing this longer than me, bobcat2; what do you think of this numerical analysis?
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Re: What's the actual all world long term average?

Post by bobcat2 »

McQ wrote: Thu Oct 21, 2021 11:12 pm
bobcat2 wrote: Thu Oct 21, 2021 2:08 pm There are a few caveats in the market return data Nisi has quoted.

There is some survivorship bias in the global data in that some countries' stock markets failed and are not included. Some examples are Poland, Argentina, Egypt, and Turkey. (Somewhat surprisingly in the early 20th century Egypt was the darling emerging stock market.) These markets individually were relatively small, but in the aggregate they would probably reduce the global stock market return by about 20 basis points were they included.

...
Hello Bobcat2: I would like to challenge your judgment that survivorship bias in the Dimson data is on the order of 20 basis points.
See NBER Working Paper 5901 - A Century of Global Stock Markets
by William Goetzmann and Philippe Jorion - January 1997
Link - https://www.nber.org/system/files/worki ... /w5901.pdf

In particular see page 14 and tables 6 & 7.

BobK
In finance risk is defined as uncertainty that is consequential (nontrivial). | The two main methods of dealing with financial risk are the matching of assets to goals & diversifying.
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Re: What's the actual all world long term average?

Post by whereskyle »

nisiprius wrote: Wed Oct 20, 2021 10:18 am
Valuethinker wrote: Wed Oct 20, 2021 9:50 am...There's also the Hyman Minsky point, that periods of extreme stability lead to adaptive behaviour which increases the volatility when it does come...
To me, one of the more concerning "signs of a top" in the forum was the recent query, What is swr if you remove worst sequences?
Does anyone know what the safe withdrawal rate would be for 30-50 yr retirement if you remove the worst sequences, say the bottom 10%? This is if you don’t believe the Great Depression can occur again or the high inflation of the 70s? It seems like most here aim for 3-4%, but that assumes the worst.
The usual debate is whether assuming the worst case that has actually occurred is too optimistic, keeping in mind Taleb's observation that by definition the "worst case" is always something that had never occurred before in history.

Quite seriously I've been struck by the number of discussions that implicitly (or explicitly) assume that the Great Depression shouldn't count, because it was a really long time ago. I think a fair number of younger people feel that way about 2008-2009.
Good point.

Vanguard's very convenient new Monte-Carlo simulation tool of course includes the possibility of another Great Depression in its potential scenarios:

https://retirementplans.vanguard.com/VG ... 50212930=1
"I am better off than he is – for he knows nothing and thinks that he knows. I neither know nor think that I know." - Socrates. "Nobody knows nothing." - Jack Bogle
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Re: What's the actual all world long term average?

Post by dukeblue219 »

nisiprius wrote: Wed Oct 20, 2021 10:18 am Quite seriously I've been struck by the number of discussions that implicitly (or explicitly) assume that the Great Depression shouldn't count, because it was a really long time ago. I think a fair number of younger people feel that way about 2008-2009.
I'm curious what you mean by younger people. I find that Millennials and younger Gen X (so, age 30 to 45ish) are still skittish of the stock market because of 08-09 and its longer term effects on their credit, job prospects out of college, and so forth. The effects of the financial crisis and broader economic conditions were brutal to many in that age range who were trying to establish careers and start families.
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Re: What's the actual all world long term average?

Post by JoMoney »

dukeblue219 wrote: Fri Oct 22, 2021 8:29 am
nisiprius wrote: Wed Oct 20, 2021 10:18 am Quite seriously I've been struck by the number of discussions that implicitly (or explicitly) assume that the Great Depression shouldn't count, because it was a really long time ago. I think a fair number of younger people feel that way about 2008-2009.
I'm curious what you mean by younger people. I find that Millennials and younger Gen X (so, age 30 to 45ish) are still skittish of the stock market because of 08-09 and its longer term effects on their credit, job prospects out of college, and so forth. The effects of the financial crisis and broader economic conditions were brutal to many in that age range who were trying to establish careers and start families.
5 to 15 years ago, I knew people/had co-workers in that age range that would have said the stock market is a scam, and would point to the financial crisis as a reason to not invest in stocks.
Over the past year, the people I know and work with in that age range might still say the stock market is a scam, but at the same time are heavily involved in trading crypto and meme stocks :annoyed
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Re: What's the actual all world long term average?

Post by strakert »

OP, presumably you're trying to use these numbers for making portfolio decisions. Here are some things to consider before you take the numbers for their face value.

In Expected Returns on Major Asset Classes, Antti Ilmanen shares these numbers and graphs for how the equity risk premium over 10 year treasuries ("ERPB") has varied over different time periods in the US:

Image

He also shares this in graph form:

Image

Note that the ERPB, even in the US, was a mere 0.5% over 1802-1899, and just 2.38% over 1960-2009. Most of the sustained excess returns in the 20th century seem to have come from the post-war period until 1960s. I'm sure Prof. McQ can correct my misinterpretations or provide more context.

So how should one determine what equity risk premium to expect going forward for making portfolio decisions?

In 2001, and again in 2011, the who's who of equity market researchers and practitioners came together to discuss various issues related to the equity risk premium. The attendees included Roger Ibbotson, Cliff Asness, Dimson, Marsh & Staunton, Larry Siegel, Jeremy Siegel, Rob Arnott, Andrew Ang, Antti Ilmanen, Peng Chen, Rajnish Mehra, and a few others. Their perspectives circa 2011 are documented here. Despite some disagreement on nearly all aspects of the ERP, including whether the ERP is forecastable, and whether historical returns are useful for doing this, this is what the experts' state of the art estimates of ERP going forward at the time were:
4% (Asness), 3-3.5% (Dimson-Marsh-Staunton), 4% (Larry Siegel), negative to slightly positive (Arnott), 3% (Ilmanen), 3.34% (wow, so precise) (Chen) and 5-6% (Jeremy Siegel). Ang et al offered a complex model but no projections.

Here are the actual returns of TSM over 10 year treasuries since 2011 on portfolio visualizer.

The TSM returned 14.06% annually in excess of 10 year Treasuries over the last 10 years since Oct 2011.

So what are you going to do with these numbers?
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Re: What's the actual all world long term average?

Post by secondopinion »

dukeblue219 wrote: Fri Oct 22, 2021 8:29 am
nisiprius wrote: Wed Oct 20, 2021 10:18 am Quite seriously I've been struck by the number of discussions that implicitly (or explicitly) assume that the Great Depression shouldn't count, because it was a really long time ago. I think a fair number of younger people feel that way about 2008-2009.
I'm curious what you mean by younger people. I find that Millennials and younger Gen X (so, age 30 to 45ish) are still skittish of the stock market because of 08-09 and its longer term effects on their credit, job prospects out of college, and so forth. The effects of the financial crisis and broader economic conditions were brutal to many in that age range who were trying to establish careers and start families.
I was in college during the time (ironically, I took a class that had a paper trading activity; justifications were graded, and actual results were extra credit if you beat the instructor [who I think was holding SPY]). Required to hold exactly five stocks, I picked Johnson & Johnson, Proctor and Gamble, Kimberly-Clark, Walmart, and Intel, I think. Going three months (Sep though Nov 2008), needless to say that I got significant extra credit.

I might have been lucky, but I picked most of them for the composite stability (except Intel, but I figured it was a decent tech stock at the time since most computers used Intel Processors).

I have never been scared of the market; if I am smart, then my choices will likely not bite me (even if there was losses). I am mostly an index investor these days, but it certainly got me outside of my shell with risk (that and 2020 with real money).
Passive investing: not about making big bucks but making profits. Active investing: not about beating the market but meeting goals. Speculation: not about timing the market but taking profitable risks.
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