Inflation & the Real Rate of Return
Offered by Rob Taylor
The real rate of return is an important personal finance concept to understand.
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.
1. CNBC.com, June 10, 2021
Investing involves risks, and investment decisions should be based on your own goals, time horizon, and risk tolerance. The return and principal value of investments will fluctuate as market conditions change. When sold, investments may be worth more or less than their original cost.
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