Key points
- Real return = Nominal return - Inflation rate.
- Critical for long-term portfolio planning.
- Negative real returns erode wealth.
Example
A savings account earning 1% nominally in a 3% inflation regime yields -2% real, losing 2% purchasing power annually.
In history
In the mid-1970s, 10-year Treasuries yielded around 7-8% while inflation exceeded 10%, so bondholders lost purchasing power. By 1981 the reverse was true: yields near 15% far exceeded inflation.
Related terms