Real vs Nominal Return
Plain-English definition of Real vs Nominal Return — part of our investing glossary.
Definition
A nominal return is the headline investment return. A real return is the nominal return minus inflation. A 7% nominal return in a 3% inflation environment delivers roughly 4% real return — which is the figure that actually matters for long-term planning.
Worked example
A savings account paying 4.5% during a year of 3.5% CPI delivers only 1% real return — £100 becomes £101 in purchasing power. Many "good" headline rates have been mildly negative in real terms over the last five years.
Why it matters
Investing is unusually unforgiving of vocabulary gaps. Costs compound, inflation compounds, and the gap between a "5% return" and a "5% real return after 0.3% fees" is the difference between a comfortable retirement and a tight one.
Common mistake
Focusing on nominal returns and headline past performance rather than fees, tax wrappers, and real (post-inflation) returns. A cheap tracker inside an ISA almost always beats an expensive active fund in a taxable account over 20+ years.
Calculators that use this concept
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See also
- Compound Interest — Compound interest is interest earned on both the original principal and on previously earned interest. Over sh…
- Pound Cost Averaging — Investing a fixed amount at regular intervals regardless of price, rather than investing a lump sum at one tim…
- Gilt (UK Government Bond) — A gilt is a UK government-issued bond. Short-dated gilts are generally considered one of the safest investment…
- CPI Inflation — The Consumer Prices Index measures the average change in prices of a representative basket of UK goods and ser…
- Expense Ratio (OCF/TER) — The annual cost of holding a fund, expressed as a percentage of assets. A 0.2% expense ratio on £100,000 is £2…