Reasonable Rate of Return: What to Expect

A reasonable rate of return on your investments is somewhere around 4-5% per year after inflation, fees, and taxes. That is the number you should use when planning your financial future as a UK investor. If you get more, great. If you plan for more, you are gambling.

That figure surprises people. Everyone has heard that the stock market returns "about 10% per year." It is one of the most widely cited numbers in personal finance, and it is not wrong. But it is not the whole story either, and the gap between the headline number and what actually lands in your pocket is where most planning mistakes happen.

Contents

• Where the 10% number comes from
• Nominal vs real returns: the inflation tax
• What UK investors actually get
• The fees you forget about
• Why averages lie
• What number should you use in your plan?
• Frequently asked questions

Where the 10% number comes from

The S&P 500 is an index of the 500 largest publicly traded companies in the United States. It includes Apple, Microsoft, Amazon, JPMorgan, and hundreds of others. When people talk about "the stock market" returning 10%, they almost always mean this index.

From 1926 to 2024, the S&P 500 has delivered a compound annual growth rate (CAGR) of approximately 10.1% per year including dividends reinvested. That is nearly a century of data, covering the Great Depression, World War II, stagflation in the 1970s, the dot-com bust, the 2008 financial crisis, and Covid. Through all of it, the long-run average has hovered around 10%.

The reason this number gets cited so often is simple: the dataset is long, the methodology is consistent, and the results are remarkably stable across different starting decades. It is the closest thing to a reliable benchmark that equity investing has.

But there is an important word buried in that statistic that changes everything: nominal.

Nominal vs real returns: the inflation tax

The 10% figure is a nominal return. It does not account for inflation. In a year where your portfolio grows by 10% but prices rise by 3%, your actual purchasing power only increased by about 7%. That is your real return - what your money can actually buy.

Over the same period (1926-2024), US inflation has averaged around 3% per year. Strip that out and the S&P 500's real return drops to roughly 6.5-7% annually. Still excellent. Still one of the best wealth-building tools ever invented. But meaningfully different from the headline number.

This matters because your financial plan does not care about nominal numbers. Your retirement does not cost a number of pounds. It costs a basket of goods and services whose prices rise every year. If you plan around 10% returns and inflation runs at 3-4%, you are overstating your wealth by a third over a 20-year horizon. That is the difference between retiring at 55 and retiring at 62.

The UK has its own inflation story. Over the last 30 years, UK CPI inflation has averaged around 2.5% per year. The Bank of England targets 2%. But recent years have shown that inflation can spike to 10%+ and stay elevated for longer than anyone expects. Planning around 2% inflation and getting 5% for three years wipes out a decade of carefully modelled returns.

What UK investors actually get

Most UK investors are not putting their money directly into the S&P 500. The standard advice - and it is good advice - is to buy a global tracker fund like the Vanguard FTSE Global All Cap or the HSBC FTSE All-World Index. These funds hold thousands of companies across the US, Europe, Asia, and emerging markets.

A global tracker is roughly 60% US stocks, with the rest spread across other developed and emerging markets. Historically, international stocks have returned slightly less than US stocks over long periods. The MSCI World Index (developed markets only) has returned about 8-9% nominal since 1970. Add emerging markets and the blend is similar but with more volatility.

Then there is currency. UK investors buying global funds are exposed to exchange rate movements. When the pound weakens against the dollar, your US holdings are worth more in sterling. When the pound strengthens, they are worth less. Over decades, currency effects tend to wash out, but they add noise and can make individual years look dramatically different from what the underlying index did.

The practical upshot for a UK investor in a global tracker: plan around 7-8% nominal returns before fees. After UK inflation (2-3%) and fund costs, you land at roughly 4-5% real returns. That is the number that should go into your FI number calculation, your retirement drawdown model, and your life plan.

The fees you forget about

Fees are the most reliable predictor of future returns, and that is not a compliment. They are the one variable you can control, and they compound against you just as powerfully as returns compound for you.

A global tracker from Vanguard or Fidelity charges an Ongoing Charges Figure (OCF) of around 0.15-0.23%. That sounds tiny. On a £100,000 portfolio, it is £150-£230 per year. Over 30 years of compounding, a fund charging 0.20% will cost you roughly £15,000 more than one charging 0.07% on the same portfolio growth. Small percentages become real money given enough time.

But the OCF is not the only cost. There is also:

• Platform fees: Trading 212 charges nothing. Vanguard charges 0.15% (capped at £375). Hargreaves Lansdown charges 0.45%. On a £200,000 ISA, that is the difference between £0, £300, and £900 per year.
• Transaction costs: not included in the OCF. These are the costs the fund incurs buying and selling securities. Typically 0.01-0.05% for large index funds, but they reduce your returns invisibly.
• Tracking error: the gap between the fund's return and the index it tracks. A well-run tracker keeps this under 0.1%. A poorly run one might lag by 0.3-0.5% annually - a hidden tax you only notice when you compare your actual returns to the benchmark.

Add it all up and the total cost of ownership for a UK investor in a low-cost global tracker inside an ISA is roughly 0.2-0.4% per year. That comes straight off your returns.

Why averages lie

The S&P 500's long-run average is 10%. But you do not invest in the long-run average. You invest across a specific sequence of years, and the order of those returns matters enormously.

From 2000 to 2009, the S&P 500 returned roughly 0% in total (the "lost decade"). An investor who put money in at the start of 2000 and checked ten years later had basically nothing to show for it in nominal terms, and lost purchasing power after inflation.

From 2010 to 2019, the same index returned about 13.5% per year. A golden decade.

Both of these decades are baked into the long-run 10% average. The problem is that you cannot know which decade you are living through until it is over. If you build your retirement plan around 10% returns and happen to retire into a lost decade, you are in serious trouble.

This is why financial planners use a concept called sequence of returns risk. The returns you get in the first few years of retirement (or the last few years of accumulation) matter far more than the average. A 30% drop in year one of retirement is devastating in a way that a 30% drop in year 15 of accumulation is not.

The lesson is not that long-run returns are useless. They are the best guide we have. The lesson is that building your plan around the best-case interpretation of the data is reckless. Use the average as a reference point, not a promise.

What number should you use in your plan?

Here is a practical framework for UK investors:

For rough mental maths: 7% nominal, 4-5% real. This is a sensible long-run expectation for a diversified global equity portfolio after fees. It is close to what UK financial advisers use in their cash flow models (the FCA's projection rate guidelines suggest 5% for equities after charges, roughly 2-3% real).

For conservative planning (recommended): 3-4% real. Use this for your FI number calculations, drawdown projections, and any plan where being wrong means running out of money. If you end up getting 5-6% real, you retire earlier than planned. If you plan around 6% and get 3%, you run out of money at 78.

For comparing investments: use the nominal return of the relevant benchmark over a comparable time period. CAGR is the right metric here. Do not compare a 5-year UK bond return to a 30-year S&P 500 average - it tells you nothing useful.

The 10% headline number is a fact about history. It is not a guarantee about your future. The gap between 10% nominal and 4% real is not pessimism. It is maths: inflation at 2-3%, fees at 0.2-0.4%, currency drag, and the reality that global returns have historically been slightly lower than US-only returns.

Use the conservative number. If the market is generous, you finish early. If it is not, you still finish.

Frequently asked questions

Is 10% a realistic rate of return?

It is historically accurate for the S&P 500 in nominal terms. But it is not what you should plan around as a UK investor. After inflation, fees, and the fact that most portfolios are globally diversified (not US-only), a more realistic planning number is 4-5% real per year.

What rate of return do financial advisers use?

UK financial advisers typically follow the FCA's projection rate guidelines, which suggest around 5% nominal for equity-heavy portfolios after charges. In real terms (after inflation), that works out to roughly 2-3%. Some advisers use higher rates for illustration purposes but stress-test plans at lower rates.

Should I use nominal or real returns in my financial plan?

Use real returns. Your plan needs to reflect what your money can actually buy in the future, not just its face value. If you model at 7% nominal with 3% inflation, you get the same result as modelling at 4% real - but it is easier to make mistakes with the nominal approach because you have to remember to inflate your expenses separately.

What has the FTSE 100 returned historically?

The FTSE 100 has returned approximately 7-8% nominal per year since its inception in 1984, including dividends. That is lower than the S&P 500 over the same period, partly because the FTSE 100 has less exposure to high-growth technology companies. This is one reason UK investors are generally advised to diversify globally rather than investing only in UK stocks.

How do I account for currency risk as a UK investor?

If you hold global funds denominated in GBP, the fund manager handles the currency conversion. You do not need to do anything extra. Over periods of 20+ years, currency movements tend to even out. In the short term, a weak pound boosts your returns from overseas holdings, and a strong pound reduces them. Do not try to hedge currency - the cost usually exceeds the benefit for long-term investors.

Read Next

• CAGR, IRR, and TWRR: Investment Returns Explained - understand which return metric to use and when
• How to Choose a Low-Cost Index Fund - keep your costs down so more of that return lands in your pocket
• Time in the Market Beats Timing the Market - why staying invested matters more than entry price
• The Boring Middle - how to stay motivated when returns feel slow

Further Reading:

The Little Book of Common Sense Investing - John Bogle - Bogle built Vanguard around the idea that low-cost index funds are the best way for most people to capture market returns. This book explains why. (Affiliate link - we may earn a small commission at no extra cost to you.)

Smarter Investing - Tim Hale - The best UK-focused guide to evidence-based investing, covering expected returns, asset allocation, and how to build a portfolio that actually works. (Affiliate link - we may earn a small commission at no extra cost to you.)