Measuring performance
Real return
Return after subtracting inflation — the only measure of whether you got richer.
How it works
Nominal returns describe how the number on the statement moved. Real returns describe what happened to what that number can buy.
Over long horizons the distinction is enormous. Several decades of positive nominal returns can be roughly zero in real terms if inflation ran high through them.
Formula
Real return = (1 + nominal return) ÷ (1 + inflation) − 1Worked example
An 8% nominal return in a 5% inflation year is 1.08 ÷ 1.05 − 1 ≈ 2.9%, not 3%.
Related terms
- InflationThe rate at which prices rise, which means the rate at which each pound or dollar buys less.
- Purchasing powerWhat your money can actually buy, rather than how many units of currency you have.
- Nominal returnReturn measured in currency units, before any adjustment for inflation.
- Inflation riskThe risk that rising prices erode what your money can buy, even when the number grows.
Mentioned in
More in Measuring performance
- Realised profit and loss
- Price return
- Risk-free rate
- Performance attribution
- Sharpe ratio
- Overfitting
- Sortino ratio
- Out-of-sample testing
All 29 Measuring performance terms · The full glossary, 433 terms
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