Real rate of return is a measure of investment performance that takes into account the effects of inflation. It is an important metric used by investors to compare investments and gain an accurate understanding of their true rate of return.

The real rate of return is calculated by subtracting the inflation rate from the nominal rate of return. For example, if the nominal rate of return on a particular investment is 6%, and the inflation rate is 3%, the real rate of return would be 3%. Inflation eats away at profits, so the real rate of return is a more accurate measure of the true performance of an investment as it shows the return that is above the rate of inflation.

The real rate of return will always be lower than the nominal rate of return unless there is zero inflation or deflation. During times of low or no inflation, the real and nominal rate of return can be equal, however, there will always be some degree of inflation and most investors use the real rate of return when assessing their investments to get an understanding of the performance of their investment in “real” terms.

It is easy to see why calculating the real rate of return is so important for investors. Knowing the true rate of return, rather than relying on the nominal rate of return that can be distorted by inflation, allows for better assessment of potential investments. Furthermore, it allows for investors to compare investment performance in different countries as it provides an accurate measure that is not influenced by changes in inflation, which can vary significantly in different countries.

Finally, it should be noted that the real rate of return does not consider taxes or other deductible expenses investors may incur. It is solely a measure of the performance of an investment, based on the real rate of return. As such, it is important to consider other factors to get an accurate picture of the return on investment such as taxes, fees, and other applicable costs.