The real rate of return is an important personal finance concept to understand. And it goes hand-in-hand with the rate of inflation.
It’s the rate of return on your investments after inflation. The real rate of return indicates whether you are gaining or losing purchasing power with your money.
So with inflation checking in at a 5% annual rate, does that mean any investment with less than a 5% rate of return is losing purchasing power?1
That’s where it gets a little complicated.
In theory, any investment with less than a 5% rate of return may lose purchasing power. But the financial markets are giving mixed signals about how long they expect inflation will stay at its current level. Fed Chair Jerome Powell has indicated that the inflation numbers we are seeing won’t be long lasting and can be attributed to improving economic conditions.2
In the end, the real rate of return is only one factor to consider when building a portfolio. Your time horizon, risk tolerance, and goals are the primary drivers.
We work with financial professionals who monitor inflation to determine whether it’s here to stay or whether it may start to trend lower. But if inflation is starting to worry you, please reach out. We’d welcome the chance to hear your thoughts.
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