Real Rate of Return

Nominal return is the headline figure. Real return is what remains once inflation is removed, and it is the one that answers whether the portfolio can buy more than it could last year.

The correct adjustment divides rather than subtracts: real return is (1 + nominal) / (1 + inflation) minus 1. At 10% nominal and 3% inflation that gives 6.8% rather than the 7% subtraction suggests. The gap is small at these levels and widens as both numbers rise, which is why Promi uses the Fisher form throughout its projection engine.

Long-run US real returns have run near 7% a year for equities, 2 to 3% for bonds, and approximately zero for cash. A balance earning less than inflation is shrinking in real terms even while the statement shows it growing.