Real return

An investment's return after subtracting inflation - what you actually gained in purchasing power.

Example

A 6% return in a year with 4% inflation is a real return of roughly 2%.

Important

A positive nominal return can still be a negative real return - the account balance went up, but it buys less than it did before.

Related terms

  • Nominal return — An investment's return in raw currency terms, before adjusting for inflation.
  • Inflation — The general rise in prices over time, which reduces how much a given amount of money can buy.
  • Purchasing power — What a given amount of money can actually buy.

Lessons that explain it

  • Four risks, an invisible dealing cost, and why interest is often the worst-taxed return — Credit, rates, inflation and liquidity are four separate risks that a single word - safe - is routinely used to dismiss. The tax treatment of interest is the one most holders never price at all. (12 min)
  • The nominal safety that loses money anyway — The balance cannot fall, and that is exactly why the real risk in this class is invisible. Inflation reduces what the money buys, and the tax is levied on the nominal interest rather than on what you actually gained. (13 min)
  • Certainty on a date, and the ability to act — Cash does two jobs no other holding can do: it will be there in full on a known date, and it lets you act without having to sell something first. It pays for both by losing purchasing power, reliably. (8 min)
  • The only class here that charges you for holding it — There is no income at all - no coupon, no dividend, no rent. The return is the price change minus the cost of carry, which means a flat price is a loss, and the loss compounds. (10 min)
  • Nothing arrives while you wait, and the wrapper sets the tax — Large declines with no income to cushion them, a running charge on an asset that pays nothing, a roll cost that hides inside a price - and in the United States, three wrappers around the same metal taxed three different ways. (12 min)
  • Sometimes the only thing that rose, sometimes the thing that fell furthest — It genuinely protects a portfolio in some shocks and genuinely makes them worse in others, and the average of those two behaviours describes neither. That is the honest case, and it is a case for a small deliberate position. (10 min)

All 578 terms in the Investing glossary