real return
The return after inflation: how much more you can actually buy. Exactly, (1 + nominal) / (1 + inflation) − 1.
Real return is the return after inflation: how much more you can actually buy, not just how many more units of money you have. The headline figure a bank or a fund shows is usually the nominal return. If prices rose by the same amount, your real return is zero even though the balance went up.
The exact formula is (1 + nominal) / (1 + inflation) − 1. A quick approximation is nominal minus inflation, which works when both are small but overstates the result when inflation is high.
For a saver whose goals are in hryvnias, the currency is part of the return too. A dollar fund measured in hryvnias gains when the hryvnia weakens, but the real return in hryvnias still has to beat hryvnia inflation. Comparing options only makes sense in real terms, in the currency you will spend.
Example
Ethan's draft landing page at Zapas says "12% a year". With 3% inflation that is (1.12 / 1.03) − 1 = 8.7% real, close to the quick estimate of 9%.
A hryvnia deposit at 14% with 10% inflation gives 1.14 / 1.10 − 1 = 3.6% real. A dollar fund earning 7% while the hryvnia loses 5% a year gives 1.07 × 1.05 − 1 = 12.4% in hryvnias, but only 1.124 / 1.10 − 1 = 2.1% real at 10% hryvnia inflation. The rates are illustrative, not forecasts.
Common mistakes
- Comparing nominal returns from periods or currencies with different inflation.
- Using the simple subtraction when inflation is high.
- Ignoring the currency when the goal is in hryvnias.
- Investments can fall, and you can get back less than you put in.
Learn it in the course
- Saving, investing, speculating and the real return · How saving, investing and speculating differ, and how to turn a nominal return into a real one after inflation and devaluation.
- A few big winners: why owning everything catches them · Over 20 years most companies do far worse than the index, almost half lose money and a handful make half the gains. Owning the whole market is the only sure way to own those few.
- Stocks vs bonds: risk capacity, tolerance and the job you have · How different stock and bond mixes behaved, and how horizon, income and nerves decide the mix.
- Case: three model portfolios and the onboarding questions · Design three model portfolios and the three questions that place a new user in one of them.
- Winners that don't repeat: luck, skill and closed funds · Where yesterday's top funds rank later, how dropping closed funds flatters the average and how long it takes to tell skill from luck.