What is Real Return?

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What is real return? Wait a minute. Is there fake return? Don’t worry. TheStreet will guide you through it. Real return is your percentage return on investment minus the rate of inflation. Sounds confusing. Well, let’s go through a real life example before we get into investments. You have $100 in your savings account in year one. Inflation is two percent in that year, so that means that prices rose. In year two, you still had $100 in your account. You got no interest on your savings (you should consider switching accounts) and the price of goods rose a little bit. Not only is it more expensive to buy that suit, that dress or dinner at that nice restaurant, but you’re less competitive in the market for those goods. Your value stayed where it was while other values rose. Investing works the same way. And by the way, this is why we invest our money. Let’s say you own a bond that pays 1.6 percent interest in one year. Let’s say inflation was 1.5 percent in that year. Your real return is adjusted for inflation, so it’s 1.6 percent - 1.5 percent. Your real return was 0.1 percent. Want to see how this works in stocks? Watch the video above.