When assessing the performance of your investments, it’s important to calculate your real returns. The most fundamental costs for investment returns are transaction fees and inflation.
As inflation goes up, investment returns will be less than they appear to be on paper. To calculate your real rate of return without inflation, you need to remove the inflation rate from your investment returns.
For example, if the inflation rate is 3% and an investor makes 15% in a given year, the value of their money would have actually increased by 12% (15% – 3% = a real rate of return of 12%).
Calculating your real return is important to ensure that an investment is worthwhile. If your return is less than the rate of inflation, then it is a problem and maybe a sign that you need to change your investments.
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