Inflation and the Real Rate of Return
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 if inflation checks in at a rate of 6%, does that mean any investment with less than a 6% rate of return is losing purchasing power?
That’s where it gets a little complicated.
In theory, any investment with less than a 6% rate of return may lose purchasing power. But there are other factors you want to consider as well. For example, are inflation rates likely to continue their current trend, or are they transitory effects of broader market changes?
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.
A financial professional can help you better understand market conditions and build an investment strategy that manages the potential loss of the purchasing power of your money.