The phrase
"nominal return" means the total amount of money or profit you earn or receive on an investment, without considering any inflation or other factors that might affect its real value. It represents the raw amount that you gain without taking into account any changes in purchasing power.
Full definition
In between, a 50/50 balanced portfolio would have an expected
nominal return of 4.7 %, or 2.7 % after inflation.
On the question of rates of return, I have a forecast of 10 %
nominal return on an all equity portfolio going out 10 years from current levels.
Add another 2 % for inflation and you are looking at
nominal returns from stocks in the neighbourhood of 6 % to 7 %.
Importantly, stocks provided positive
nominal returns in many times when inflation was both positive and negative, even strongly so.
Why would anyone ever accept a
negative nominal return when they could always simply hold cash and earn a zero return?
The
term nominal return describes the rate of return before adjusting for inflation, and the term real return describes the rate of return after adjusting for inflation.
It shouldn't be surprising that the overall performance would have been excellent: the
average nominal return was 8.3 %.
When rates rise, bonds will eventually
provide nominal returns equal to their yield over a time period equal to their duration, even if it takes an extended period of time.
And we can think of our expected
nominal return as that expected real return plus our domestic inflation rate, without needing to incorporate the nominal exchange rate.
So with inflation at 2 %, which closer to where we are today, a more
reasonable nominal return expectation ought to be 8.4 % going forward.
As the inflation rate increases,
higher nominal returns must be earned in order to obtain a desired real rate of return.
I'd argue that a much cleaner way to look at the relationship between returns and inflation is to use
only nominal returns.
But either type of bond investment is unlikely to result in
negative nominal returns, as long as you hold them for the appropriate duration.
You can plug - in the inflation rate and annual
nominal return for any investment and get RR, the real (inflation adjusted) return.
Plugging in the numbers from our VISVX example for total
nominal return gives us (21090 / 10000) ^ 0.1 — 1 = 0.0775 = 7.75 % (this version of the formula uses the spreadsheet symbol for exponentiation, ^, and uses the decimal form of 1⁄10).
Total cumulative interest returns from P2P lending are about half as those from a CD with the same
nominal return rate.
The following is a table showing the historical real returns of
nominal return bonds from 1926 through November 2009.
We
use nominal returns because the bond yield is stated in nominal terms and includes an expected market inflation rate.
Selsick estimates the relationship between the Shiller - 16 and subsequent 16 - year total returns in the S&P 500, and arrives at a 16 - year estimate of
prospective nominal returns of 4.94 % annually.
Figure 1 shows that an investor in 1915, investing in the 60/40 portfolio, and reinvesting all cash flows for the next century, earned an
annual nominal return of 8.4 %, composed of 10.3 % from equities and 5.6 % from bonds.
Also given the low growth, low inflation and low interest rate environment and the somewhat above average valuation numbers, one has to expect
lower nominal returns from equities as compared to the past.
By countenancing these mergers and leaving inefficient operations intact, the Fed created enormous firms that are clearly too big to manage and generally do not generate positive risk - adjusted or
even nominal returns.»
I believe it's fair to say that as we look at a world where very few asset classes globally have produced
positive nominal returns year - to - date, and a world where US corporate earnings and economic growth have been tepid at best, increasingly ascending US equity valuations connote incremental capital concentration.
Subsequently, within the course of the same survey, they were asked to choose between two possible financial investments, one that gives a fixed
nominal return after twelve months, and another that yields a return indexed by inflation, again after one year.
Assuming nominal returns are 6.5 % a year, a straightforward calculation shows the transactions tax will raise about $ 6.75 from our hypothetical retirement saver over the stipulated 10 - year holding period.
Dear Ksam, Almost all the debt funds are giving
very nominal returns as there is no clear trend (upward / further downward) for interest rate cycle.
With that in mind, plus the fact that this portfolio has had a roughly 10 %
nominal return since that time, I am very happy with it, because despite the inflation insurance of gold, the total portfolio return has been great and the volatility very low.
This graph of S&P 500
nominal return data minus the CPI inflation rate (the virtual definition of real returns) illustrates this conclusion.
This table provides both the exact and quick estimates of real returns using a 2 % annual inflation rate and expected
future nominal returns for stocks, bonds, and cash as presented in Article 6.2.
In today's markets there just isn't that much in the way of
nominal returns where we can afford to lose much to our own unforced errors.
The shorthand estimate of 10 - year
nominal returns works out to 1.06 * (15/7.5) ^ (1/10)-1 +.087 = 22 % annually.
However, he cautions these numbers
reflect nominal returns so if inflation averages 2.5 % a year, the return on a balanced 60/40 portfolio would fall from 5.4 % to 3 % before investment expenses.
I understand that US treasury bonds themselves are low - risk and a
guaranteed nominal return (that is, ignoring inflation) upon maturity.
Jordon, I'm basing the 7 %
nominal return more or less on Bernstein's work where he assumes that returns will be less than in the past.