Lower Expected Returns Anchoring
The 20th century was exceptional — build your retirement plan around something closer to 5% real
One of the most actionable conclusions from the DMS 125-year database is that the 20th century produced unusually high equity returns — partly because of structural tailwinds (industrial revolution payoffs, US hegemony, declining inflation) and partly because of survivorship bias in the way historical data was collected. The early 21st century has already shown lower average returns than the 20th century, and the 19th-century evidence suggests that the 20th century was the historical outlier, not the norm.
The practical implication for individual investors and financial planners is straightforward: when running a compound interest calculator or building a retirement model, anchor the equity return assumption to something materially lower than the 20th-century average. The DMS global real equity return is approximately 5% annualized; the US-only number is higher but represents a best-case outlier. A financially honest projection should stress-test against 3-4% real returns, not the 7-10% nominal figures that circulate in popular financial media.
This framework is not pessimism — it is calibration. Staunton still expects equities to outperform bonds over the long run, and still advocates for equity-heavy portfolios for investors with long time horizons. The adjustment is about magnitude, not direction: the equity premium is real and persistent, but its size in the 21st century is likely to be smaller than the 20th-century evidence suggests.
- The 20th century was the best century for equity investors in recorded history — extrapolating it forward is optimistic, not evidence-based.
- Real global equity returns of approximately 5% annualized are the best survivorship-corrected baseline for long-run planning.
- The 19th century showed a smaller equity premium than the 20th — the 21st century may revert toward the longer historical norm.
- Stress-testing a retirement plan at 3% real returns is not pessimism; it is the risk management implied by the data.
- The direction of the equity premium — equities outperforming bonds over the long run — is robust; its magnitude is not.
- Replace nominal with real return assumptionsMost popular compound-interest projections use nominal return figures (7-10%) that embed an inflation assumption. Strip out inflation and work in real terms — the DMS global real equity return is approximately 5% annualized, with individual country variation around that figure.Pro tipThe US real return is higher (~6.5-7%) but is the best-performing major market in the sample — use it only if you have strong reasons to overweight US equities in your projection.WarningProjecting 10% nominal returns without an explicit inflation assumption leads to systematic overestimation of real purchasing-power accumulation.
- Adjust the baseline downward for 21st-century conditionsStaunton explicitly advocates anchoring forward-looking projections on numbers lower than the DMS 20th-century averages. Current valuation multiples in the US are elevated; the structural tailwinds of the 20th century (industrialization, globalization, declining inflation) are largely spent. A 1-2 percentage point reduction from the historical baseline is a reasonable starting adjustment.Pro tipRun three scenarios: historical average (optimistic), historical average minus 1.5pp (base), historical average minus 3pp (stress). The plan should be viable under the stress case.WarningDo not reduce the assumption below the point where equities still outperform bonds — the risk premium is not expected to disappear, only to shrink.
- Subtract fees explicitlyThe adjusted real return minus annual fees is the net return your plan will actually compound. At 5% real with a 1% annual fee, net real return is 4%; at 5% real with a 0.07% index fund fee, net real is 4.93%. The difference compounds dramatically over 30+ years.Pro tipThis is where Negative Alpha Certainty (see cross-references) intersects with return anchoring — fee reduction is the one lever that directly improves net returns without any forecasting uncertainty.
- Stress-test your savings gap at the lower returnRecalculate your retirement date or required savings rate using the lowered assumption. If the plan only works at 8% real returns, it is not a plan — it is a hope. A robust plan survives at 4% real returns with a reasonable probability of achieving goals.WarningMost popular retirement calculators default to historical average or slightly above — check the default and override it to something consistent with forward-looking DMS estimates.
- Match time horizon to risk allocationThe lower expected return makes time horizon even more critical. Investors with long horizons (30+ years) can ride out the variance inherent in a lower but still-positive equity premium. Those with shorter horizons (under 15 years) face a meaningful probability of negative real returns in equities and must hold more fixed income as a result.Pro tipStaunton's rule: the best equity investors are those who 'hope for good outcomes and can live with lousy outcomes.' The lower return assumption makes the lousy-outcome scenario more likely — plan for it.
At the end of the episode, the host explicitly advises listeners to take a good compound interest calculator and run it at approximately 5% real returns — the DMS global figure — rather than the 10% nominal figure typically quoted in popular financial media. He suggests varying the assumption up and down to understand the sensitivity of the retirement projection.
The Norwegian Government Pension Fund Global operates under a spending rule of 3% of fund value per year (reduced from 4%). This rule was calibrated to be sustainable under long-run expected returns that are lower than the realized 20th-century average — exactly the framework Staunton advocates.
Staunton uses Cambridge colleges to illustrate time-horizon-dependent return assumptions. Very wealthy colleges with centuries-long time horizons can hold high-equity, high-variance portfolios. Colleges endowed recently with smaller endowments, whose investment income might be needed to repair a roof next year, must hold safer assets even at the cost of lower long-run returns.
US institutional investors spent decades increasing international exposure based on DMS-style global return evidence, only to have US equities dramatically outperform in the 2010s. Those who diversified globally underperformed those who stayed domestic — despite making the 'correct' evidence-based decision.
Staunton makes this argument directly in the episode, prompted by a question about how investors should use the DMS data. He explicitly states that looking forward from the beginning of the second quarter of the 21st century, people should anchor on numbers lower than those documented in Triumph of the Optimists. This is the synthesized takeaway from the full DMS research program: 125 years of data, corrected for survivorship and multi-country averaging, still points to the 20th century being exceptional rather than representative of a permanent structural level of returns. Marsh reinforces this by noting that the 19th-century evidence — before the US equity premium became the textbook standard — showed a much smaller premium.