WWhen I started planning my financial future, I became obsessive about achieving a practical return on investment. All investment calculators required one.
That number also determined the whole lot else—like how much I needed to avoid wasting and the way long it might take before I could declare financial independence.
It seemed essential. Because after I counted up the number, I used to be telling myself a fairy tale, right?
Eventually, I read enough stale PDFs and insomnia books to persuade myself I had a solution.
The average inflation-adjusted return on a portfolio of world stocks was about 5%. This is what returns data from greater than 100 years say.
You could dig up an identical number for bonds and the whole lot else.
Do the maths and also you’re done! Uniquely tested, personalized returns.
Data mining
Then the exertions begins. Years of hacking at FI’s coal mine. Celebrate once you hit a seam double-digit returns. The face turns black if you end up burned a fireball of negative numbers.
But it is the damnedest thing. This seemingly achievable average return rarely occurs. Because investment returns are rarely average:
Data from JST macro history , The Big Bang , Before the cult of justice , A Century of British Economic Trends , St. Petersburg Stock Exchange Project , World financial markets And MSCI. February 2026.
No matter what number of annual return charts I see, I never get used to how crazy the variance is. But this carnival of volatility is a much better representation of the actual investing experience.
In the chart above, the blue line represents the typical annual return for world stocks from 1900 to 2025. It is currently 5.6%. (All returns on this post are inflation-adjusted total returns in GBP).
However, you may count in your fingers what number of annual returns even come near this number. Over 126 years!
What’s OK if returns are available in above the blue line:
But when the bad years come, it’s super bleak. Then everyone wonders in the event that they were sold a puppy.
Biased optimism
Fortunately, losing streaks don’t occur that always, as you may see from the graph. We have not experienced a couple of negative 12 months in a row because the dot-com bust of 2000-2002.
Since then, nonetheless, interest in DIY investing has exploded. I can only imagine the fear and disgust that may reverberate throughout the community if (if…) we experience a situation more akin to the 2000s, Seventies, or Thirties.
I suppose there isn’t a cure for human nature. But the Pollyanna problem has been on my mind these days given the shockingly extreme US market valuations.
Goldfinger
The wide difference in returns we see in stocks also applies to each other asset class during which you may plausibly seek refuge. Like gold for instance…
Data from The London Bullion Market Association. February 2026.
Gold won within the last decade. It’s also been an excellent 12 months (to date).
Tried? Remember, annual gold returns are proven to be crazy.
The last 20 years have been amazing. But the 20 years between 1980 and the 12 months 2000? Not a lot.
in gold
Show me the cash
Data from JST macro history , UK Government Securities Database And Millennium macroeconomic data for the United Kingdom, . February 2026.
Of course, money operates inside a narrower range. But inflation and abrupt rate of interest fluctuations can wreak havoc on returns.
I still wonder why everyone invested in money market funds when rates of interest shot up in 2022. Had they forgotten the big bear market within the money market that began in 2009?
From 2009 to 2023, money markets lost over 27%. Every 12 months except one was a loser. But it just didn’t feel prefer it because we do not keep it real. (By that I mean adjusted for inflation!)
Its materials for skid marks
AQR , Summer harbor And BCOM TR. February 2026.
Commodities are even scarier than stocks. About 42% of years are negative, while for world stocks it is simply 30%. To withstand this volatility, you wish a forged iron stomach.
But also take a look at the variety of years during which commodities have returned over 20% – and even 40% – in comparison with stocks.
The penny finally drops once you realize that bonza commodity years often occur when stocks are in the bathroom.
The average return on commodities also looks pretty good: 4.3% on an annual basis. On the opposite hand, this asset class is the epitome of “anything can happen and probably will.”
Gilded complex
Data from JST macro history And FTSE Russell. February 2026.
Finally, there are government bonds – whose approval rankings fell to Trump levels as UK government bonds posted their second-worst annual return on record in 2022.
All-stocks gilts (like those present in most UK government bond funds and ETFs) aren’t really much easier in your nerves than stocks. Worse, their average return is a miserable 0.76%.
The secret, nonetheless, shouldn’t be to have a look at bonds alone. Bonds make no sense when viewed in isolation. The magic happens once you lump them along with other assets.
A bit like most individuals don’t eat raw chilies, however it’s widely agreed that they do add something to curries.
Enter the potfolio
Don’t even take into consideration stealing my awesome latest pot folioTM Idea. I registered the Bejesus from it as a trademark. (What is that? “…?”)
The improvement led to by sufficient diversification shouldn’t be entirely obvious in graph form. However, the down bars are definitely fewer and stockier.
However, once you take a look at the raw numbers, the difference becomes clearer:
| World stocks | The Potfolio | |
| Annualized return | 5.6% | 5% |
| Biggest 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 foregoing a small return, you get fewer and fewer severe down years. That means:
- Shallower drawdowns
- Shorter drawdowns
- Less volatility
- Better risk-adjusted performance
The Ulcer Index is a measure of downward pain that converts the depth and length of the descent right into a single metric. A lower number is best.
introduced me to the Ulcer Index developed by.
The Ulcer Performance Index is a risk-adjusted performance ratio that divides the annual excess return by the Ulcer Index number. Here higher is best.
You say portfolio, I say pot folio, you say “make one.”
I didn’t spend any time optimizing the portfolio. It is just an equity-oriented version of an all-weather portfolio.
Essentially, you hold positions in assets that when combined can handle most individuals’s shopping list with worries:
- Growth – Stocks
- Inflation – commodities, index-linked government bonds
- Recession/Panic – Treasuries, Gold, Cash
- Stability/Liquidity – Cash
But as much as everyone accepts the concept of diversification, it’s fair to say that investors are spending more time fascinated by the way to meet their immediate desires. For example, bank as quickly as possible, if not faster. To the purpose where the dangerous chickens come home to roost – and poop all over the place.
So should you’re nervous about AI bubbles or something like that, you have to be bolder in your diversification. What I mean by that is that you must consider investing in asset classes that appear painful in a vacuum, but that may be combined to facilitate your success.
This way, you may aim to be just a little more average most years – and if that makes the difference between staying invested for the long haul or exiting at a market low, it is going to make all of the difference.
Be calm,
