Real return
An investment’s return after inflation — the growth in what your money can actually buy.
Real return is the growth of an investment after inflation is stripped out. It measures the change in what your money can actually buy, rather than the larger figure printed on a statement. A nominal rate tells you how many more euros you have; a real rate tells you whether those euros stretch further or less far than before.
How to think about it
The quick approximation is real return ≈ nominal rate minus inflation. It’s not exact arithmetic, just a workable shortcut for everyday thinking, since the true relationship compounds the two rates together rather than simply subtracting them.
Take €10,000 invested at 5% for 20 years. On paper, that grows to €26,533. But if inflation runs at 2% throughout, that €26,533 only buys what €17,856 buys today. The nominal rate of 5% and inflation of 2% combine to give a real rate of about 2.94% a year, roughly the 5% minus the 2% the shortcut predicts. That real rate, applied over the same 20 years, is what actually describes the growth in purchasing power.
Why it matters
A statement showing a positive nominal return can still represent a loss once inflation is accounted for. If prices rise faster than the nominal rate, the real return turns negative, and the money buys less at the end than it did at the start, even though the account balance is higher. Judging an investment purely on its nominal rate, without asking what inflation did over the same period, hides this risk. The real return is the number that says whether an investment genuinely built wealth or simply kept pace with, or fell behind, rising prices.