In this series, we bust the jargon and explain a popular investing term or theme. Here it’s Real Returns.
What do you mean?
The amount that you earn from an investment after inflation is taken into account.
To calculate the real return from a savings account, say, you would subtract the current rate of inflation from the ‘nominal’ or advertised rate.
At present, the average rate on an instant access bank or building society account is 0.30 per cent.
Subtract inflation – which, as we learnt this week, has gone up to 7 per cent – and the real return is minus 6.7 per cent, which means that you are losing a considerable amount of money. No wonder inflation is dubbed the ‘invisible thief’ of savings.
Ups and downs: To calculate the real return from a savings account, say, you would subtract the current rate of inflation from the ‘nominal’ or advertised rate
Do shares provide a real return?
Since 1908, shares have tended to outperform cash in this respect, but not in every case. The theory is the extra risk of investing in the stock market should provide a greater reward.
Between 2008-2018, shares gave a real return of 5.8 per cent, against minus 2.5 per cent for cash, according to figures from broker AJ Bell.
But, in the previous decade, the real return from cash was 2.4 per cent while that from shares was minus 1.5 per cent.
The total return from a share is made of the capital gain, plus dividends and other distributions. if you bought a share a year ago and its value has increased by 4 per cent and it has also paid a dividend of 3 per cent, the total return would be 7 per cent.