When I began planning my financial future, I became obsessed with nailing a realistic rate of return [1]. All of the investment calculators required one.
Plus, everything else flowed from that number – such as how much I needed to save [2], and how long it would be before I could declare financial independence [3].
It seemed important. Because if I highballed the number then I was telling myself a fairy story, wasn’t I?
Eventually I read enough fusty old PDFs and insomnia-curing books to convince myself I had an answer.
The average inflation-adjusted rate of return for a portfolio of global equites was about 5%. More than 100 years of returns data said so.
You could dig up a similar number for bonds, too, and all the rest.
Do the maths [1], and hey presto! One time-tested, personalised rate of return.
Data mining
Then you get down to the hard work. Years of hacking away at the FI coalface. Celebrating when you hit a seam of double-digit returns. Face blackened when you’re scorched by a fireball of negative numbers.
But it’s the damnedest thing. That oh-so-achievable looking positive average return hardly ever turns up. Because investment returns are rarely average:
[4]Data from JST Macrohistory [5] 1 [6], The Big Bang [7] 2, Before the Cult of Equity [8] 3 [9], A Century of UK Economic Trends [10] 4 [11], St. Petersburg Stock Exchange Project [12] 5 [13], World Financial Markets [14] 6 [15], and MSCI [16]. February 2026.
No matter how many annual return charts I see, I never get used to how nuts the variance is. Yet this carnival of volatility is a far better portrayal of the actual investment experience.
In the chart above, the blue line is the average annualised return for World equities [17] 1900 to 2025. It currently stands at 5.6%. (All returns in this post are inflation-adjusted, GBP total returns).
However you can count on your fingers the number of annual returns that remotely resembled that figure. Across 126 years!
Which is fine and dandy when returns come in over the blue line: “Yay, I’m above average – maybe I’ll get to retire early?”
But it’s super-bleak whenever the bad years roll in. Then, everyone wonders if they’ve been sold a pup.
Optimism biased
Luckily a string of defeats doesn’t happen very often, as you can see from the chart. We haven’t experienced more than a single negative year in a row since the Dotcom Bust of 2000 to 2002.
Since then though, interest in DIY investing has exploded. I can only imagine the fear and loathing that’ll reverberate through the community if (when…) we suffer a sequence more like the 2000s, the 1970s, or the 1930s.
There’s no cure for human nature I suppose. But the Pollyanna problem has been on my mind lately, given nerve-janglingly extreme US market valuations [18].
Gold fingered
The wide variation of returns we see with equities holds too for every other asset class you can plausibly take refuge in. Such as gold…
[19]Data from The London Bullion Market Association [20]. February 2026.
Gold won the past decade [21]. It’s also having a great year (so far).Tempted? Beware that gold annual returns are certifiably insane.
The last 20 years have been amazing. But the 20 years between 1980 and the year 2000? Not so much.
Necessary historical footnote: The GBP gold price before 1975 was mostly either fixed or distorted by the impact of government regulation. Find out more in our deep dive [22] into gold.
Show me the money
[23]Data from JST Macrohistory [5] 7 [24], British Government Securities Database [25] 8 [26], and Millennium of Macroeconomic Data for the UK [27], 9 [28]. February 2026.
Cash operates in a narrower range, sure. Yet inflation and abrupt interest rate swings can send returns haywire.
I still wonder why everyone piled into money market funds [29] when interest rates spiked in 2022. Had they forgotten the enormous cash bear market that raged from 2009?
Money markets lost over 27% from 2009 to 2023. Every year bar one was a loser. But it just didn’t feel like it because we don’t keep it real. (By which I mean inflation-adjusted!)
His skid mark materials
[30]AQR [31] 10 [32], Summerhaven [33] 11 [34], and BCOM TR [35]. February 2026.
Commodities [36] are even scarier than equities. Some 42% of years are negative versus just 30% for World equities. You need a cast iron stomach to withstand that level of volatility.
But also look at the number of years commodities returned over 20% – and even 40% – in comparison to equities.
The penny finally drops when you discover that bonza commodities years often occur when equities are in the toilet [37].
Commodities’ average return looks pretty good, too: 4.3% annualised. Then again, this asset class is the epitome of ‘anything can happen and it probably will’.
Gilt complex
[38]Data from JST Macrohistory [5] 12 [39], and FTSE Russell [40]. February 2026.
Lastly, if not leastly, there’s government bonds [41] – whose approval rating sank to Trumpian levels when gilts dished out their second-worst annual return on record in 2022 [42].
All Stocks gilts (as featured in most UK government bond funds and ETFs) aren’t really much easier on the nerves than equities. Even worse, their average return is a miserable 0.76%.
The secret though is not to view bonds on their own. Bonds don’t make any sense in isolation. The magic happens when you throw them into a pot with other assets.
Kinda like how most people don’t eat raw chillies, but there’s widespread agreement that they add something to curries.
Enter the Pot-folio
Don’t even think about stealing my amazing new Pot-folioTM idea. I’ve trademarked the bejesus out of it. (What’s that? “Just stick to the charts, mate…?”)
[43]The improvement wrought by sufficient diversification isn’t totally obvious in chart form. The down rods are definitely fewer and stumpier, though.
However looking at the raw numbers highlights the difference more clearly:
| World equities | The Pot-folio | |
| Annualised return | 5.6% | 5% |
| Deepest drawdown | -51.8% | -36.5% |
| Longest drawdown | 13 years | 10 years |
| % years -10% or worse | 15% | 9% |
| Volatility | 16.2% | 11.6% |
| Ulcer Index | 18.4 | 9.8 |
| Ulcer Performance Index | 0.28 | 0.47 |
In exchange for giving up a little return, you get fewer and less severe down years. That means:
- Shallower drawdowns
- Shorter drawdowns
- Less volatility
- Better risk-adjusted performance
The Ulcer Index is a measure of downside pain that translates drawdown depth and length into a single metric. A lower number is better.
Portfolio Charts [44] introduced me to the Ulcer Index as devised by Peter Martin [45].
The Ulcer Performance Index is a risk-adjusted performance ratio that divides the excess annualised return by the Ulcer Index number. Here higher is better.
You say portfolio, I say Pot-folio, you say “Go do one”
I haven’t spent time optimising the Pot-folio. It’s just an equity-tilted variant of an All-Weather portfolio [46].
Essentially, you maintain positions in assets that when combined can cope with most people’s shopping list of worries:
- Growth – equities
- Inflation – commodities, index-linked gilts [47]
- Recession / panic – government bonds, gold, cash
- Stability / liquidity – cash
However, as much as everyone buys into the concept of diversification, it’s fair to say investors spend more time thinking about how to satisfy their immediate desires. Such as making bank as quickly as possible, if not quicker. Right up to the point that the risk chickens come home to roost – and crap all over the place.
So if you’re nervous about AI bubbles or whatnot, be bolder with your diversification. By which I mean, consider investing in asset classes [48] that look painful when viewed in a vacuum, but that can be blended together to smooth out your ride.
This way you can aspire to be a bit more average most years – and if that means the difference between you staying invested for the long run and bailing out at some market bottom, it’ll make all the difference.
Take it steady,
The Accumulator
- Jordà O, Knoll K, Kuvshinov D, Schularick M, Taylor AM. 2019. “The Rate of Return on Everything, 1870–2015.” Quarterly Journal of Economics, 134(3), 1225-1298.[↩ [53]]
- Kuvshinov D, Zimmermann K. 2021. “The
Big Bang: Stock Market Capitalization in the Long Run.” Journal of Financial Economics,
Forthcoming.[↩ [54]] - Campbell G, Grossman R, Turner JD. 2021. “Before the cult of equity: the British stock market, 1829–1929.” European Review of Economic History. 25. 10.1093/ereh/heab003.[↩ [55]]
- Chadha J, Rincon-Aznar A, Srinivasan S, Thomas R. “A Century of UK Economic Trends.” ESCoE, NIESR and Bank of England.[↩ [56]]
- Radchenko P. “St. Petersburg Stock Exchange Project.” Yale School of Management, International Center for Finance.[↩ [57]]
- Moore L. “World Financial Markets, 1900–25.” Working paper.[↩ [58]]
- Jordà O, Knoll K, Kuvshinov D, Schularick M, Taylor AM. 2019. “The Rate of Return on Everything, 1870–2015.” Quarterly Journal of Economics, 134(3), 1225-1298.[↩ [59]]
- Cairns A, Wilkie D, ESCoE Historical Data Repository. “Heriot-Watt / Institute and Faculty of Actuaries / ESCoE British Government Securities Database.” ESCoE.[↩ [60]]
- Thomas R, Dimsdale N. 2017. “A Millennium of Macroeconomic Data for the UK.” Bank of England.[↩ [61]]
- Levine, Ooi, Richardson, Sasseville. 2018. “Commodities for the Long Run.” FAJ.[↩ [62]]
- Bhardwaj, Janardanan G, Rajkumar, Geert Rouwenhorst K. 2020. “The First Commodity Futures Index of 1933.” Journal of Commodity Markets. 2020.[↩ [63]]
- Jordà O, Knoll K, Kuvshinov D, Schularick M, Taylor AM. 2019. “The Rate of Return on Everything, 1870–2015.” Quarterly Journal of Economics, 134(3), 1225-1298.[↩ [64]]