Investor Corner/Start here/Foundations
1.1.5 Nominal vs Real Returns
The percentage return you see quoted is the nominal return. Subtract inflation from it, and what's left is the real return. That is the only number that actually tells you whether you got richer.
Two numbers, one often hidden
A fixed deposit advertising 7% is quoting a nominal return: the stated percentage, with no adjustment for anything. If inflation over the same period runs at 5%, the real return, the part that actually increases what you can buy, is only about 2%. The nominal figure is what's printed on the brochure. The real figure is what matters to your standard of living.
This gap is easy to miss because nominal returns are the only number most products advertise. Nobody puts the real return on a poster, even though it is the only one that answers the question am I actually getting wealthier?
Comparing across asset classes
The gap between nominal and real returns varies by asset class and by period. A very safe instrument can have a nominal return that barely clears inflation, leaving a real return close to zero, while a growth asset with a higher nominal return can still leave meaningfully more in real terms even after the same inflation is subtracted.
The number to anchor on
When comparing two investments, or judging whether a goal is on track, the real return is the one worth anchoring on. A portfolio can show a healthy nominal number every year and still be quietly failing to build wealth, if inflation has been eating most of the gain the whole time.
How PriLytics helps. PriLytics computes XIRR on every holding so you always have the actual nominal return in front of you, ready to compare against inflation and against every other asset you hold. See how returns are computed.