Building a plan on US returns is a bet, not a neutral assumption
The claim
The US equity market was among the best performers of the twentieth century, so projections calibrated to US history embed a survivorship-flavoured assumption.
Why we rate it moderate
The cross-country return data is solid and carefully constructed. What it implies about future returns is a matter of interpretation.
Dimson, Marsh and Staunton assembled consistent long-run return series for more than twenty national markets back to 1900. The dispersion is enormous. Several markets that looked perfectly reasonable to an investor in 1900 delivered decades of negative Real returnReturn after inflation has been removed: what your money can actually buy afterwards, not what the number on the statement says. A 7% return in a 3% inflation year is a real return of about 3.9%.Read the evidence on this →, and two were effectively wiped out entirely. The US sits near the top of the distribution.
This matters because the standard planning inputs — a 7% nominal equity return, the 4% Withdrawal rateThe percentage of the starting portfolio taken in the first year of retirement, then usually raised with inflation each year after. The 4% figure is a historical result for one country and one portfolio, not a law.Read the evidence on this →, the shape of a Monte Carlo simulationRunning a plan through thousands of randomly generated futures instead of one assumed average. It replaces a single answer with a distribution, which is a more honest shape for a forecast. distribution — are calibrated on the single most successful major market, selected precisely because it was successful. That is a subtle form of Survivorship biasMeasuring only what is left. Fund league tables that exclude closed and merged funds flatter the survivors, and the funds that disappear are disproportionately the ones that did badly. baked into the foundations of retirement planning.
The practical response is not despair. It is to hold global equities rather than a single country's, and to build a plan that survives a base case a little worse than the US historical record. Our defaults sit below the realised US average for exactly this reason, and the historical simulator is explicit about being US-only.
Where this breaks down
- Global diversification does not eliminate the problem — it reduces single-country risk but global markets fall together in severe crises.
- Some of the US's outperformance reflects genuine structural advantages rather than luck, and reasonable people disagree about how much.
- Currency exposure complicates international holdings, and hedging costs money. This is a real trade-off, not a free lunch.
Terms used on this page
The same definitions the underlined words open, written out so nothing on this page depends on a click.
- Real return
- Return after inflation has been removed: what your money can actually buy afterwards, not what the number on the statement says. A 7% return in a 3% inflation year is a real return of about 3.9%. Evidence →
- Withdrawal rate
- The percentage of the starting portfolio taken in the first year of retirement, then usually raised with inflation each year after. The 4% figure is a historical result for one country and one portfolio, not a law. Evidence →
- Survivorship bias
- Measuring only what is left. Fund league tables that exclude closed and merged funds flatter the survivors, and the funds that disappear are disproportionately the ones that did badly.
- Monte Carlo simulation
- Running a plan through thousands of randomly generated futures instead of one assumed average. It replaces a single answer with a distribution, which is a more honest shape for a forecast.
Sources
Follow these rather than taking our word for the summary.
Elroy Dimson, Paul Marsh and Mike Staunton (2002). Triumph of the Optimists: 101 Years of Global Investment Returns
Princeton University Press
Finding: Long-run real equity returns varied dramatically across 16 countries; focusing on the US overstates the typical experience.
Clifford S. Asness, Roni Israelov and John M. Liew (2011). International Diversification Works (Eventually)
Financial Analysts Journal, 67(3), 24-38
Finding: International diversification fails to protect against short-term crashes, when correlations converge, but delivers its benefit over long horizons where country outcomes diverge.