What is real return and how can you protect against inflation in portfolios?

• A. Nominal return minus inflation
• B. Inflation minus nominal return
• C. Nominal return plus inflation
• D. Inflation times nominal return

Answer: (A)

Real return represents how much your purchasing power grows after accounting for inflation. It’s found by subtracting the inflation rate from the nominal return. For example, if a portfolio earns 8% and inflation is 3%, the real return is about 5%. If inflation exceeds the nominal return, the real return is negative, meaning you’re losing purchasing power despite nominal gains.

To protect against inflation in portfolios, include assets and strategies that tend to hold up or rise with inflation. Inflation-protected securities like TIPS adjust with inflation to preserve purchasing power. Equities can provide growth that outpaces inflation over time and may benefit from pricing power. Real assets such as real estate and commodities often move with inflation, offering another hedge. Diversification and periodic rebalancing help maintain a resilient real-return target, while considerations like shorter-duration or floating-rate debt can reduce sensitivity to rising prices. The goal is a balanced mix that aligns with risk tolerance and time horizon while anchoring the portfolio against inflation.