inflation
Only the real return counts
The rule
The only return that counts is what is left after rising prices and tax. A gain on paper can still be a real loss in your pocket.
Where it flips
Chasing high returns just to beat rising prices can push you into risk you cannot hold. The answer to rising prices is the right time frame and the right asset, not gambling.
Buffett wrote that rising prices are like a hidden tax, and can hurt more than any real tax. Bogle said the same the other way round. Always measure returns after tax, and after rising prices. Take a fixed deposit paying 6.5%. Prices rise 6%, and tax takes a third of your interest. In terms of the groceries it can buy, your money is going backwards. R0 teaches you to read every 'safe' return this way before you call it safe.
A worked example
A 6.5% fixed deposit, taxed at 30%, leaves you 4.55%. Prices rise 6%. So your real return is about minus 1.4%. The money buys less each year. [illustrative]
How to spot it
- ·returns shown after tax is taken out
- ·returns compared to price rises, not to zero
- ·the after-price-rise number written down
Warren Buffett & John C. Bogle · Berkshire letters; Bogle on investing