Understanding Real vs Nominal Returns
Portfolio performance is often judged in a vacuum. To understand if you are truly building wealth, you must account for the impact of inflation on investment returns. Real returns adjust for purchasing power, while nominal returns reflect raw dollar growth.
Average Return FAQ
? What is a good average annual return for a portfolio?
Historically, a 100% equity portfolio (S&P 500) has returned roughly 10% annually before inflation. A balanced '60/40' portfolio has typically targeted 6-8% nominal returns. These are historical averages and do not predict future performance. Returns that exceed inflation by a meaningful margin have historically been considered strong, but individual results vary.
? How is CAGR different from simple average return?
Simple average is just the sum of yearly returns divided by the number of years. CAGR is the 'smoothed' rate that would be required for the investment to grow from its starting to ending value, assuming the investment compounded annually.
? How do I calculate CAGR in Excel?
You can use the formula: =((EndValue/StartValue)^(1/Years))-1 or the RRI function: =RRI(Years, StartValue, EndValue).
? Is 7% a realistic annual return for the stock market?
Historical data shows that while the market is volatile year-to-year, the long-term real return (after inflation) of the US stock market has averaged around 6.5% to 7% over extended periods. Past performance does not guarantee future results, and individual investment outcomes will vary based on timing, fees, and market conditions.