Your Investment Return Isn't What You Think: The One Number You're Probably Ignoring
Have you ever looked at your investment statement, seen a healthy green number—say, a 7% or 8% gain—and felt a sense of accomplishment, only to then go to the grocery store or the gas station and feel like you’re falling behind? It’s a frustrating and common financial contradiction. On one hand, the numbers say, "My portfolio is growing!" On the other, your daily experience whispers, "But everything costs more."
This is a classic either/or dilemma that can create a false sense of security. Many investors focus exclusively on that top-line number, the one that’s easy to see and feels good to quote. But what if there was a way to resolve this conflict?
At our firm, we apply a constitutional, Contradiction-Free Living approach to finance. We believe in both/and solutions that bring clarity and confidence. The solution here is to embrace the full picture: My portfolio is growing, AND I understand how to measure its real growth after inflation to ensure my vision for the future is secure. This post will give you a simple, sound, and profoundly safe tool to do just that. We’ll move beyond the headlines to the number that truly matters for your financial foundation.
The Allure of the 'Big Number': Why We Are Drawn to Nominal Returns
When you log into your brokerage account, the first number you see is almost always your nominal return. It’s the straightforward percentage gain or loss your investments have achieved over a period. An 8% gain is an 8% gain. Simple, clean, and satisfying.
Our brains are wired to love this simplicity. The financial media amplifies it, trumpeting market performance with big, bold numbers. This creates a powerful feedback loop that trains us to equate this single data point with progress. As a DIY investor or someone just starting to work with a planner, it’s the most visible metric of success.
But as a Chartered Financial Consultant (ChFC®), I can tell you that relying on this number alone is like trying to navigate a ship using only your speed, without considering the ocean’s current. It tells you part of the story, but not the part that determines whether you’ll actually reach your destination. The trustworthy tortoise of finance knows that slow and steady progress is only effective if you’re moving forward in the real world.
The 'Grocery Store Test': A Simple Analogy for Understanding Inflation's Quiet Impact
To understand the missing piece of the puzzle, let’s leave the world of spreadsheets and try a simple, real-world thought experiment I call the "Grocery Store Test."
Imagine last year, you could fill your shopping cart with a specific set of items—milk, bread, eggs, chicken, and your favorite coffee—for exactly $100. This year, you walk into the same store and put the exact same items in your cart. You get to the checkout, and the total is $104.
Nothing about the items changed, but their cost went up by 4%. That 4% is inflation. It’s the invisible force that quietly reduces the amount of "stuff" each of your dollars can buy. We call this your purchasing power. Inflation is the steady, silent current working against your financial ship. If you ignore it, you might be moving full-steam ahead but actually be drifting backward.
The Constitutional Calculation: How to Find Your Real, Inflation-Adjusted Return
Now, let’s bring this back to your investments with a beautifully simple, foundation-first calculation. To find out how much your purchasing power has actually grown, you need to calculate your real return.
The formula is a cornerstone of sound financial planning:
Real Return = (1 + Nominal Return) / (1 + Inflation Rate) – 1.
Let's use an example. Suppose your portfolio had a nominal return of 7% for the year—a number most people would be happy with. During that same year, the official rate of inflation (often measured by the Consumer Price Index, or CPI) was 3%.
- Nominal Return: 7%
- Inflation Rate: 3%
- Real Return: 1.07/1.03 - 1 = 3.88%
That 3.88% is the number that matters. It represents the true increase in your ability to buy goods and services. Your wealth didn't just grow in dollars; it grew in what those dollars can do for you. This is the first step in moving from abstract numbers to concrete, real-world security.
Why This Matters for Your Foundation: Connecting Real Returns to the 'Safe' Principle
This isn’t just a technical exercise; it’s a foundational act of financial self-care. The first principle of our SafeSimpleSound (S3) constitutional approach is Safe. A plan isn't safe if it looks good on paper but fails the Grocery Store Test.
Consider a scenario where your investments returned 3%, but inflation was 4%. Your nominal return is positive, but your real return is -0.96%. In this case, despite your account balance going up, your ability to afford your desired lifestyle has actually decreased. You have more money but less wealth.
This is why our planning process is guided by the constitutional principle of Vision-First Direction. Your financial goals aren’t just about hitting a certain dollar amount. They’re about funding a vision for your life—a retirement filled with travel, the ability to support your family, or the freedom to pursue your passions. By focusing on your real, inflation-adjusted return, you ensure that your financial plan is always directed toward that tangible, real-world vision. As a ChFC®, my professional duty is to build plans grounded in this reality, ensuring your future lifestyle is genuinely secure.
A Shift in Perspective: Your First Step Toward Measuring What Truly Counts
Understanding the difference between nominal and real returns is more than just a new calculation; it's a profound shift in perspective. It’s a move away from the noise of the market and toward the signal of your own life. It’s choosing constitutional confidence over headline hype.
This focus on real purchasing power is a hallmark of the S3 approach. We don't chase the highest possible number at all costs. Instead, we build a sound, durable foundation designed to steadily grow your real wealth over time. It may not be as exciting as the latest market fad, but like the tortoise, it’s the approach that wins the race for a secure and fulfilling life. By embracing this simple truth, you are taking a powerful first step toward measuring what truly counts.
Before you check your portfolio's performance again, find this month's inflation rate (CPI). How does that change the story your returns are telling you?
This post is part of our Investments True Return Series.
DISCLAIMER: This content is for educational purposes only and should not be considered personalized financial advice. Always consult with a qualified financial professional before making financial decisions.