What is a Real Return?

Posted On 2019-10-15 Author: Dirk

In our industry, there is a very high focus on returns. If you open the financial magazines you’ll see everyone advertising that they have the best returns over some time - we’re talking about 10, 12, 15, 20% returns. What is important, however, is what this return means to you and your financial plan, and your goals that you are actually trying to achieve.

What is a Real Return?

So, what you really should be focused on is the real return that you are getting. A real return is the return you are getting over inflation. Inflation is the greatest enemy for any investor - we need to be outperforming inflation. As an example, if inflation was sitting at 5% and you’re getting a 10% return that equates to a 5% real return. This is what’s important.

Why is it important?

What is also important is that there is a real return after tax. So in other words, if you are saving at a bank and you’re maybe getting a 7 or 8% return, after tax depending on your tax rate you could very well be keeping up with inflation or even falling behind.

Where will I get a real return?

History shows us that, in the long run, the place you will get a real return is in the equity market, that is, in the share market. So, to achieve a real return in the long run you have to have a certain amount of exposure to the equity market, which in turn means there will be some volatility in your portfolio.

Remember, stay invested, don’t try and time the market - it’s time in the market that counts.

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