06 August 2013

Normal Return & Real Return & Relationship with Inflation

Many of us know that Time is Money. But what does it really mean? For example, for investors who have a few million dollars, 3 days for them could mean for few hundred if they park their money in Fixed Deposit. So the bigger capital you have, the more you have to appreciate your time because it could mean a big amount to others. 

Now, let's talk about the normal return, real return and their relationship with inflation. I try to write it in layman term (simplified version) for your better reading here: 

Real Return = Normal Return - Inflation Rate

For example, if you have earned about 1% from fixed deposit. This is your normal return of 1%. But if you deduct it from inflation rate, your real return could be in negative term. While we are living in low interest rate and high inflation environment, there is little we can do to increase our excess cash value. 

You can argue that you can still earn 1% - 2% in your bank account in Singapore. But due to the high investment return, what you can purchase now with your excess cash could be lesser than what you can buy 1 year ago. So what is the point of parking your money in fixed deposit in long run? 

In long run, equity investment is one of the best asset classes. The share prices will go up eventually in tandem with revenue & earnings growth. As long as we can purchase good quality counters with low / reasonable price, I believe we could have higher chances in achieving financial freedom goal for better retirement life. 




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