A return that beats zero isn't automatically a good one. It has to beat inflation first, or your money is quietly shrinking while the balance grows.
9 min read · Level 1
A 'safe' investment that guarantees you get your original money back while inflation quietly erodes what that money can buy is not actually safe - it has simply moved the risk somewhere most people were never taught to look for it.
Inflation is the general rise in prices over time, which steadily reduces what a fixed sum of money can buy. Nominal return is what your statement shows - the raw percentage gain. Real return is what's left after subtracting inflation, and it's the number that actually reflects whether your purchasing power grew.
Because nominal returns are what get advertised and what people naturally focus on, and a positive nominal number can hide a negative real one - meaning you technically made money and are still worse off than before in terms of what it can actually buy.
Educational, not personalised financial advice. Nothing in the Investor Academy is a recommendation to buy, sell or hold anything — what is right for you depends on your own circumstances and the rules where you live.
An investment returns 5% in a year where inflation runs at 6%. The statement shows a gain - more dollars than you started with - but the real return is roughly negative 1%. You have more money and it buys less than your original amount could have bought a year earlier. Meanwhile, cash sitting untouched in a zero-interest account during that same year has a real return of roughly negative 6% - a guaranteed loss of purchasing power, even though the number on the statement never moved at all.
The common mistake is treating a 'guaranteed' fixed return, or cash itself, as risk-free simply because the nominal number is certain. Certainty about the nominal number says nothing about whether it will outpace inflation - the real return can still be negative and just as certain.
When comparing returns, across investments or across time periods, subtract the inflation rate for that period before drawing any conclusion.
Cash's real return is approximately negative the inflation rate - it isn't a risk-free zero, it's a near-certain small loss of purchasing power.
A 4% return sounds different in a 1% inflation environment than in a 7% one - never compare nominal figures across periods with different inflation without adjusting.
For goals decades away, plan around expected real returns, not nominal ones, since it's future purchasing power you actually care about.
Whenever comparing returns across time, or evaluating whether an investment is genuinely growing your wealth versus just keeping pace with rising prices.
For very short time horizons, the difference between nominal and real return matters much less in absolute terms - it compounds into significance mainly over years and decades.
It is widely documented across most economies that cash held outside of any interest-bearing account over multi-decade periods loses a substantial share of its purchasing power to inflation, even in countries with historically low and relatively stable inflation rates.
The absence of nominal loss over decades of holding pure cash disguises a very real, cumulative real loss.
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