Real return
What is it?
It is the financial return of an investment adjusted for inflation or any other factor that affects the purchasing power of money. Real return takes into account the impact of the loss or gain in the value of money during the investment period, providing a more accurate measure of performance that reflects the true purchasing power of the profits obtained.
To calculate the real return, the nominal return is adjusted for the inflation rate. This allows investors to understand how much they have truly gained or lost in terms of purchasing power, considering that even if an investment has a positive nominal return, inflation may erode that return.
Key aspects to consider
Real return is essential for evaluating the performance of an investment in a broader economic context, as it reflects the true value of the income generated by the investment. While nominal return may seem attractive, real return provides a more accurate view of whether an investment is truly delivering additional value once the impact of inflation has been considered.
It is important to note that real return can vary depending on economic conditions and the inflation rate. In high inflation environments, even an investment with high nominal returns may have a negative real return, meaning the investor has lost purchasing power.To properly evaluate an investment, investors should calculate and consider both nominal and real returns, as this will allow them to make more informed decisions about their investment options.