By Stephen L. Thomas | November 3, 2023 | In
When it comes to evaluating investment performance, two essential concepts play a crucial role: nominal returns and real returns. Both are used to measure the gains or losses on an investment, but they present different perspectives due to their consideration of inflation. Let’s explore the difference between nominal and real returns and how they impact investment analysis. Nominal Returns Nominal returns are the simplest and most commonly reported form of investment returns. They represent the absolute percentage increase or decrease in the value of an investment over a specific period, expressed without any adjustment for inflation. For instance, if an investment grows by 10% in a year, the nominal return for that period would be 10%. Nominal returns provide a clear and straightforward understanding of how an investment is performing on the surface. They are useful for assessing the growth of an investment in nominal terms and comparing it to the performance of other investments without taking inflation into account. However, nominal returns may not provide an accurate representation of the actual purchasing power gained from the investment. Real Returns Real returns, on the other