The importance of ‘real returns’.
If you are investing for the long term you should look to generate ‘real returns’, but what are they?
Real returns can best be described as the return on an investment less the reduction in its value by inflation. You must not forget that to grow real wealth, your returns must beat inflation.
Inflation is a measure of the general increase in the prices of goods and services over time. Therefore, if your investment fails to beat inflation over a set time period, the money you have at the end will be able to buy less than you could at the start!
Most people would feel that a return of 10% per year would represent a good return, but until that return is put into the context of the level of inflation over the period you cannot be sure.
Say, for example, that inflation had been 2% over the period; this would produce a very nice real return of 8%. However if inflation had been 12%; this would have produced a real rate of return of -2%, not so good.
In this second scenario even though the return on investment looks positive, the effect of inflation has reduced the amount of goods or services which you could buy with your invested funds. This is why ‘real returns’ are so important and why as an investor you should be more concerned with real returns than with headline rates of return.
For straightforward money advice from the independent financial advisers at ARK Financial Planning call on 0161 303 9977 or email us for no obligation, stress free investment advice.
Personal Finance | Commercial Mortgages | Retirement Planning and Pensions | Inheritance Tax | Equity Release | Mortgages and Remortgages | Insurance | Contact ARK Financial Planning
The importance of ‘real returns’.
If you are investing for the long term you should look to generate ‘real returns’, but what are they?
Real returns can best be described as the return on an investment less the reduction in its value by inflation. You must not forget that to grow real wealth, your returns must beat inflation.
Inflation is a measure of the general increase in the prices of goods and services over time. Therefore, if your investment fails to beat inflation over a set time period, the money you have at the end will be able to buy less than you could at the start!
Most people would feel that a return of 10% per year would represent a good return, but until that return is put into the context of the level of inflation over the period you cannot be sure.
Say, for example, that inflation had been 2% over the period; this would produce a very nice real return of 8%. However if inflation had been 12%; this would have produced a real rate of return of -2%, not so good.
In this second scenario even though the return on investment looks positive, the effect of inflation has reduced the amount of goods or services which you could buy with your invested funds. This is why ‘real returns’ are so important and why as an investor you should be more concerned with real returns than with headline rates of return.
For straightforward money advice from the independent financial advisers at ARK Financial Planning call on 0161 303 9977 or email us for no obligation, stress free investment advice.
Personal Finance | Commercial Mortgages | Retirement Planning and Pensions | Inheritance Tax | Equity Release | Mortgages and Remortgages | Insurance | Contact ARK Financial Planning