Definition
Real return adjusts a nominal return for inflation. The exact relationship is (1 + nominal return) / (1 + inflation rate) - 1; subtracting inflation is only an approximation.
- An investment return adjusted for inflation so the result reflects the change in purchasing power rather than only nominal growth.
The question this metric answers
What did the nominal return mean for purchasing power after inflation?
- A positive nominal return can still leave purchasing power flat or lower when inflation is high.
- First establish the nominal return and the inflation rate for the same period. Then apply the inflation adjustment explicitly instead of using 'real return' as a synonym for cash-flow-aware performance.
Evidence required before the number deserves trust
Nominal return and matching-period inflation evidence
- Start with a nominal return measured over a defined period.
- Use an inflation rate covering the same period and currency context.
- Exact relationship: (1 + nominal return) / (1 + inflation rate) − 1.
- Do not use real return as a synonym for TWR, MWR, IRR or 'true return'.
What investors often miss
Real return is an inflation concept. Deposits, withdrawals and the choice between time-weighted and money-weighted return are separate methodology questions.
- Account count does not change the definition. The underlying nominal portfolio return still needs a consistent scope and period before an inflation adjustment can be meaningful.