real return

Example

“Her portfolio earned 7% but with 3% inflation the real return was only 4%.”

Memory Tip

REAL RETURN — subtract inflation from your gains. That's your actual wealth increase.

Why It Matters

Real return reveals whether your investments are truly making you wealthier or just keeping pace with rising prices. Without understanding real return, you might think your savings are growing when inflation is actually eroding your purchasing power, leading to poor financial decisions about where to invest your money.

Common Misconception

Many people focus only on the nominal return they see reported by their bank or investment account and assume that percentage gain represents their actual wealth increase. They fail to account for inflation, which means a 5 percent return during a year with 4 percent inflation only gave them a 1 percent real return in actual buying power.

In Practice

If you invest 10,000 dollars in a bond fund that earns 6 percent, you would have 10,600 dollars after one year. However, if inflation was 3 percent that year, your real return is only about 3 percent because the 3 percent inflation has reduced what those dollars can actually purchase, meaning your true purchasing power increased by only about 300 dollars in todays money values.

Etymology

From Latin 'realis' meaning actual plus Old French 'retorner' meaning to return.

Common Misspellings

Related Terms

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