How to Calculate Real Rates of Return
Many investors measure the success or failure of investments by the rate of return that the investment yields. The nominal rate of return measures the return without taking into account inflation. However, rates of return can be influenced by inflationary pressures, so some people prefer to measure the rate of return after inflation, also known as the real rate of return. To calculate the real rate of return, you need to know the price you paid for the investment, the price you sold the investment for and the inflation rate during the time you held the investment.
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Instructions
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Subtract the final value of your investment from the initial cost of the investment. For example, if invested $10,000 in a mutual fund and sold it a year later for $11,000, you would subtract $10,000 from $11,000 to get $1,000.
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Divide the result from step 1 by the initial value of the investment. Continuing this example, you would divide $1,000 by $10,000 to get 0.1.
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Multiply the result from step 2 by 100 to convert from a decimal to a percent to calculate the nominal rate of return. In this example, you would multiply 0.1 by 100 to get 10 percent.
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Look up the rate of inflation over the time period that your investment took place. You can use an online calculator (see resources). For example, if your mutual fund investment took place between Jan. 2007 and Jan. 2008, inflation was 4.28 percent.
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Subtract the inflation rate from the nominal rate of return to find the real rate of return. Finishing this example, you would subtract the inflation rate of 4.28 percent from the nominal rate of return of 10 percent to find your real rate of return equals 5.72 percent.
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References
Resources
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