Nominal Return vs Real Return

One of the things many people confuse when investing is the nominal return vs the real return on investment.

The nominal return on an investment is the money made without factoring expenses, such as inflation, taxes, and fees.

The real return on an investment is the return made on an investment after subtracting costs, such as inflation, taxes, and fees.

A one-year Treasury bill has an interest rate of 3.3%. That means it has a nominal return of 3.3%.

The inflation for the month of May was 12.4%. This means the treasury bill has a negative real return of -9.1% (12.4% - 3.3%).

If a stock has a dividend yield of 10% and has gained 5% in price over a year, its total return is 15%.Its real return after factoring inflation will be 2.6% (15% - 12.4%).

While having a positive real return is key, there are some situations where that may not be possible. With t bills doing 3.3% and microfinance firms giving a circa 10% return on a one year deposit. Many options are currency negative returns. SO what does one do?

You may decide to increase the portion you place in medium and low-risk assets. The same rules still apply. The bulk of your assets should be in low-risk assets.

If you have any questions, please feel free to share.

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