Why are investors more concerned with the real returns than the nominal returns on their investments?

Asked on by lscrivy

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

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The reason for this is that real returns are a more important measure of how much you have gotten for your investment.  It looks at the actual buying power of the money that you have gotten from that investment.  When you are measuring nominal returns, you look only at the dollar value, not at the value of the dollars.

Let's say you invest in something and you get a 10% return after 1 year.  Not bad, right?  But what if inflation was 8%?  Now you've only got a 2% real return.  You would want to know the real return so you could know how much buying power (as opposed to how many dollars) you are actually getting from your investment.

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