What should be considered when assessing the real value of investment returns?

The real value of investment returns is fundamentally concerned with how effectively those returns generate purchasing power over time. To truly assess investment performance, it’s essential to consider not just the nominal returns— the raw percentage gains or losses—but also the impact of inflation on those returns.

Inflation erodes the purchasing power of money, meaning that even if an investment shows a positive nominal return, if inflation is high, the actual value of those returns can be significantly diminished. For instance, if an investment yields a nominal return of 5% in a year with 3% inflation, the real return is only 2%. This real return is what investors can ultimately use to improve their standard of living or reinvest.

Other factors, while important in their own right (like average market performance and currency exchange rates), do not directly relate to the intrinsic value of returns as influenced by inflation. Thus, focusing on the impact of inflation is essential for an accurate reflection of investment performance and informed decision-making.