I just put down one of our national papers where an investment guru, whom I shall not name, talked up cash because, after all, the other investment returns were offering low rates of return.
What was not mentioned was the real rate of return. The real rate of return calculates the value of growth after you have accounted for inflation. If your investment has grown 10 per cent in value, but inflation is 10 per cent, then in real terms your investment has the same value as when you bought it.
Thankfully, Australian inflation is way below – it now stands at 1.3 per cent; which means that your investment only has to make a 1.4 per cent return and it has turned a profit. In 2008, inflation ran at five per cent, which means your investment had to grow at a much higher rate to make a real profit.
Of course, the Australian property market’s run of double-digit growth cannot continue. But, with inflation so low, in real terms you can still make a profit.
The same applies to other investment classes: equities; bonds; or Frozen-Concentrated-Orange-Juice. It’s the real rate of return that determines if you are better-off investing or hiding your cash under the mattress.