30 years: Financial markets trader
Chances are when someone quotes a figure for investment returns it’s likely to be on a nominal or gross basis, without taking into account the effects of inflation. Purchasing power only increases if returns outstrip inflation over a given period. Abdulla addresses this fact and explains how to measure real returns for a single period, and over time, to help us understand inflation-adjusted returns.
Chances are when someone quotes a figure for investment returns it’s likely to be on a nominal or gross basis, without taking into account the effects of inflation. Purchasing power only increases if returns outstrip inflation over a given period. Abdulla addresses this fact and explains how to measure real returns for a single period, and over time, to help us understand inflation-adjusted returns.
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4 mins 42 secs
Real returns are in other words, inflation adjusted returns. Over the long-term, it’s important to consider the impact of inflation on returns to determine if we are wealthier. We increase our purchasing power or wealth, if our returns outstrip inflation over a given period.
Key learning objectives:
Identify the two methods in calculating real returns
Use the calculation to determine if wealth has increased or decreased
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Years | Inflation Index | Nominal Rates/Returns | Inflation Rate | Fisher | Real Rates | Investment |
0 | 100.00 | 100.00 | ||||
1 | 102.00 | 5.00% | 2.00% | 3.00% | 2.94% | 105.00 |
2 | 104.50 | 3.00% | 2.45% | 0.55% | 0.54% | 108.15 |
3 | 107.00 | 6.00% | 2.39% | 3.61% | 3.52% | 114.64 |
4 | 109.20 | 2.00% | 2.06% | -0.06% | -0.05% | 116.93 |
5 | 113.00 | 7.00% | 3.48% | 3.52% | 3.40% | 125.12 |
Given those returns and those inflation rates, we have increased our wealth, on average, by 2.0581% above inflation.
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