Anyone who invests money usually first looks at the stated return. Whether savings account, bonds, equities or ETFs, percentages are advertised everywhere. But not every return shows how strongly your wealth is actually growing.
The key difference lies between nominal and real return. While the nominal return shows the pure increase in value, the real return additionally takes inflation into account. Especially in Switzerland, with phases of rising inflation, this difference can be significant.
In this guide, you will learn in a simple and understandable way what nominal and real return mean, how to calculate them and why real return is crucial for your long term wealth building.
What is the nominal return
The nominal return is the stated interest rate or increase in value of an investment without taking inflation into account.
It shows by what percentage your invested capital has increased over a certain period of time.
Example
You invest 10,000 CHF in an ETF. After one year, your portfolio is worth 10,500 CHF.
Nominal return:
5 percent
These 5 percent represent the pure increase in value, regardless of how purchasing power has changed during that time.
The nominal return is the figure that banks and asset managers usually communicate.
.
What is the real return
The real return additionally takes inflation into account. It shows how much your purchasing power has actually increased.
When prices rise, money loses value. Even if your wealth grows nominally, you may not be able to afford more than before.
Example with inflation
Nominal return: 5 percent
Inflation: 2 percent
Real return:
approximately 3 percent
Although your wealth has increased by 5 percent, your actual gain in purchasing power is only around 3 percent.
Why is the real return so important
For your long term wealth building, what matters is not the account balance, but your purchasing power.
If inflation is higher than your nominal return, you are losing money in real terms.
Example
Nominal return: 1 percent
Inflation: 2 percent
Real return:
minus 1 percent
Although your wealth grows on paper, your purchasing power declines.
This risk is particularly high with savings accounts or conservative investments that offer low interest rates.
How to calculate the real return
For a simplified calculation, you can use the following formula:
Real return ≈ Nominal return minus inflation
For more precise calculations, the formula is:
Real return =
(1 + nominal return) divided by (1 + inflation) minus 1
Concrete example
Nominal return: 6 percent
Inflation: 2.5 percent
Real return =
(1.06 / 1.025) − 1 = approximately 3.4 percent
The higher the inflation, the more the real return deviates from the nominal return.
Nominal vs real return in Switzerland
Inflation also plays an important role in Switzerland. Although it was historically low for a long time, it was significantly higher in certain years.
For investors, this means:
- Short term fluctuations in inflation can strongly influence real returns
- In the long term, investments should clearly exceed inflation
- For retirement goals or wealth building, real return is decisive
This difference is particularly relevant for:
- Pillar 3a solutions
- Pension fund benefits
- Long term ETF savings plans
- Bond portfolios
Which investments offer positive real returns in the long term
Historically, productive real assets such as equities have delivered higher real returns in the long term than pure cash investments.
Typical tendencies:
- Savings accounts often generate negative real returns
- Bonds can be slightly positive or negative in real terms depending on the interest rate environment
- Equity markets usually deliver positive real returns in the long term
- Real estate can also preserve or increase value in real terms
Important: Past returns are not a guarantee of future performance.
Common misunderstandings
A high nominal return automatically means wealth growth
Not necessarily. What matters is how high inflation was during the same period.
Low inflation is irrelevant for investors
Even low inflation rates have a strong impact over decades, especially due to the compound interest effect.
Real return only matters during periods of high inflation
Even with 1 to 2 percent inflation, losses in purchasing power accumulate significantly over 20 or 30 years.
Important to know
- Nominal return does not take inflation into account
- Real return shows the actual gain in purchasing power
- For long term goals, real return is decisive
- Inflation has a stronger effect over years than many investors assume
- Especially for retirement planning, you should calculate in real terms
Summary
The nominal return shows how much your wealth grows on paper. The real return, however, shows how much your purchasing power actually increases.
For your long term wealth building in Switzerland, real return is decisive. Only if your investments consistently exceed inflation will your wealth grow in real terms.
Anyone who invests should therefore not only look at percentages, but always consider inflation as well.
FAQs
Nominal return shows the pure increase in value of an investment. Real return additionally takes inflation into account and shows the gain in purchasing power.
Because it shows whether your wealth is actually gaining or losing purchasing power.
For long term wealth building, it should be positive and ideally clearly above zero.
Not necessarily. What matters is whether your investments achieve higher returns than the inflation rate.
A central one. Over decades, even moderate inflation can significantly reduce your purchasing power if returns do not keep pace.
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