Imagine you’re at a carnival, and you win 100 tickets—the exact amount needed to bring home that shiny prize you’ve been eyeing on the top shelf. But when you reach the prize counter, it suddenly costs 120 tickets; prices went up while you were playing ring toss. Those 100 tickets? Not as valuable as you thought.
Welcome to the difference between nominal returns (the tickets you see) and real returns (what those tickets actually buy after inflation). As stewards at Robinson Value Management, we’re here to cut through the carnival noise and focus on what keeps your wealth growing in real terms.
The investment industry loves to flaunt nominal returns—those big, shiny numbers that make your portfolio look attractive. Why? They’re simple, they’re sexy, and they sell.
When a fund manager boasts a 10% return, you’re ready to pop the champagne. However, if inflation is running at 4%, your real return is closer to 6%.
And if you’re spending 4% annually to maintain your lifestyle? You’re barely breaking even.
The industry knows this, but talking about inflation isn’t fun. It’s easier to pitch nominal returns and let investors bask in the glow of unadjusted gains.
Additionally, many investment managers don’t evaluate real returns when making investment decisions. They pursue benchmarks like the S&P 500, which are reported in nominal terms. We believe that pursuing nominal results does not benefit your long-term investment goals.
Real returns, adjusted for inflation, are what protect your purchasing power over the long haul, ensuring you can still afford that dream vacation in a few years or retirement home in a couple of decades.
To illustrate, let’s look at two charts showing the risk (standard deviation) of various stock-bond portfolio blends over 1-, 2-, 5-, 10-, and 20-year periods.
Chart #1: Uses nominal returns, the industry’s go-to metric.
Chart #2: Adjusts for the actual inflation rate (averaging 2.9% from 1926 to 2024) and a 4% annual withdrawal to reflect real-world spending.
Chart 1 Source: Robinson Value Management, Ltd., based on S&P 500 and U.S. Treasury bond data, 1926-2024
Real Return & Risk After 4% Annual Spend Various Stock and Combinations 19262024
The data, sourced from historical performance of the S&P 500 and U.S. Treasury bonds (1926-2024), reveal a striking difference.
In nominal terms, different blends are required to produce the lowest risk or the optimal ratio of return to risk over 1, 2, 5, 10, and 20 years, balancing equity volatility with bond stability. The nominal return result for a 60/40 blend is the industry’s darling for good reason; it is steady, predictable, and easy to sell.
When we adjust for inflation and spending, the return picture shifts. By focusing on return volatility, the industry avoids the real risk: An unrecoverable loss of purchasing power.
Picture your portfolio as a garden. Nominal returns are the flowers you see blooming today—pretty, but they wilt when inflation heats up. Real returns are the healthy perennials that rebloom and thrive through all seasons. The industry’s obsession with colorful flowers keeps clients happy in the moment, but it’s the perennials that deliver happiness years later.
Tracking whether your portfolio keeps up with both inflation and regular distributions sets a high bar— but it’s a practical and necessary one.
To optimize the risk/reward ratio defined in this way generally requires a larger allocation to equities. That’s what gives the investor a more honest chance at growing purchasing power over the long term. However, with more equity exposure comes more market-related (systemic) risk, and that risk needs managing.
Traditionally, the industry relies on intermediate bonds (notes with maturities of 1 to 10 years) to play defense. However, we believe the typical 20%–40 % bond allocation doesn’t sufficiently protect or optimize an investor’s risk-reward profile.
There are better tools to manage this “systemic equity risk” without so much damage to their return expectations. Tools that focus on larger allocations to equities are most likely to increase long-term return potential.
So, what’s an investor to do?
Seek managers and advisors who buck the trend and dare to talk about the unsexy stuff—real returns. Ask: “How do my investments perform after inflation and withdrawals?”
If you’re increasing equity exposure, ask how that risk is being hedged and whether intermediate bonds are the best answer.
At Robinson Value Management, we measure every decision against inflation’s bite, ensuring your wealth grows not just in dollars but in what those dollars can buy.
We’re not here to dazzle you with carnival prizes; we’re here to build a solid portfolio that stands the test of time. Let’s keep the focus on real returns, so your wealth doesn’t just shine today but buys the life you want tomorrow.
