nominal return

Example

“The nominal return of 8% sounded impressive but the real return after inflation was just 5%.”

Memory Tip

NOMINAL — the headline number. Real return is what actually matters.

Why It Matters

Nominal return helps you understand the stated performance of your investments before considering how inflation erodes your purchasing power. It matters because it sets expectations for investment growth, though you should also track real return to know if your money is truly growing in value.

Common Misconception

Many people assume that a nominal return of 7 percent means their wealth increased by 7 percent in actual buying power. However, if inflation is 3 percent during that same year, their real return is only about 4 percent, meaning their investments did not keep pace with rising costs.

In Practice

Suppose you invest 10,000 dollars in a bond fund that delivers a nominal return of 5 percent, earning you 500 dollars in one year for a total of 10,500 dollars. If inflation during that year is 2 percent, your real return is roughly 3 percent because your purchasing power only increased by about 300 dollars in today's dollars.

Etymology

From Latin 'nominalis' meaning relating to a name — the named or stated return.

Common Misspellings

Related Terms

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