top of page
MYFE logo

In support of

The Brain Tumour Charity logo

In support of

Get the latest investment news and updates.

The Returns Matrix

Updated: Feb 20

... and it's impact on Managing & Planning Your Financial Expectations.

Stationary binoculars from the shore with a mountain behind.

The Returns Matrix

There are at least 5 types of investment returns.

Which one(s) are you monitoring, and how might this influence your financial planning?

Investment returns are measured in at least five simple but very different ways. It’s a critical issue that easily confuses the inattentive and has a major impact on our planning processes.

When market professionals and the media discuss investment returns, they are not necessarily referring to the same outcome; it frequently depends on the commentator’s underlying motive. Indeed, depending on how the expression is being applied to the same data, investment returns can be used to tell two diametrically opposed narratives.

What makes our lives difficult is that many professionals and journalists don’t tell us which return(s) they’re referencing or demonstrating. In reality most of them refer to Nominal Total Returns, the highest of returns. It’s a legitimate approach; in using Total Nominal Returns they are more easily able to compare apples with apples when highlighting asset class or portfolio performance.

Nevertheless, it is our responsibility to make sure we understand how the commentator is defining investment returns. To do this you first need to appreciate how the expression ‘returns’ can vary significantly in meaning.

Below are the four generic returns:

The Investment Returns Matrix

The Investment Returns Matrix

Nominal Returns

Nominal returns are a simple arithmetic calculation of how the price of an asset or multiple assets have changed over time. No other variables are applied to this return outcome.

Real Returns

Real returns are the same as nominal returns but calculated after deducting the impact of inflation over the period being measured. If investors were unable to beat inflation over time, they would seek to invest in other assets to preserve their wealth. In many instances, therefore, real returns are better than nominal returns for assessing a meaningful performance of your investments and their ultimate purchasing power.

Nominal Total Returns

Nominal total returns are the same as nominal returns, i.e. before accounting for inflation. However, this definition not only includes the price value of your asset holdings but also includes all dividends and interest received from those same holdings on the basis they have been reinvested over the same time. The difference in your investment performance outcome is enormous (see Figures 1 and 2).

Total nominal returns are the ones you are most likely to hear and see discussed / illustrated in the media when asset classes are being compared.

Real Total Returns

Again, the same as nominal total returns, but after adjusting for inflation. Essentially this is the definition you need to know when reviewing any investment and when establishing both your appetite for risk and thus portfolio allocation. It is the most important measure of basic returns from your long-term perspective.

The fifth return is the most important of all, namely:

Because everybody’s costs and tax situation are potentially different, market commentators – with justification – rarely use this term when talking generally about investment returns.

Figure 1 illustrates how the four generic returns differ significantly in outcomes.

Figure 1: FTSE 350 Nominal, Total Nominal, Real and Total Real Returns

Rebased to 1987

Figure 1: FTSE 350 Nominal, Total Nominal, Real and Total Real Returns

Data source: Refinitiv

Remember, data can be manipulated to reinforce pretty much any story. You’re the customer when it comes to investing your money, so make sure whatever is being presented to you is being done from your perspective and fairly compared, i.e. apples with apples.

Figure 2 is the same four generic return outcomes as they relate to the USA S&P 500 index.

Figure 2: S&P 500 Nominal, Total Nominal, Real and Total Real Returns

Rebased to 1987

Figure 2: S&P 500 Nominal, Total Nominal, Real and Total Real Returns

Data source: Refinitiv

[N.B. Interestingly, the FTSE 350 Total Real Returns and Nominal Returns are in the reverse order to those of the S&P 500. This is best explained by understanding dividends for the UK stock market relative to share price increases are larger and more influential than is the case in the USA. An article in the Sunday Times of 16 January 2022 gave the dividend yield for the FTSE 100 as 3.8%, and that for the S&P 500 as 1.4%.

If UK share price increases have been low (which the FTSE 350 graph shows they have, see Real Returns), then dividends will have a major influence such that Total Real Returns exceed Nominal Returns. The price of USA shares, especially those of technology companies which comprise 30% of the S&P index, have risen sharply but, relatively speaking, dividends less so. Amazon hasn’t paid a dividend, but it’s share price continues to rise in tandem with its ever growing market share, and Apple only paid its first major dividend in 2012. In this instance Nominal Returns could exceed Total Real Returns as shown in Figure 2.]

Just to reinforce the importance of inflation on our financial expectations, and thus why monitoring real returns is vital, Figure 3 illustrates how long it takes for our money’s purchasing power to drop by 50% given various rates of inflation.

Figure 3: The time it takes for inflation to halve our money

Figure 3: The time it takes for inflation to halve our money

Hence, if inflation runs at 5% your money will only retain half its value at the end of 14 years.

There’s one other aspect of inflation you need to consider. If you like the nicer and more expensive things in life you will have a higher personal inflation rate. Why? Because luxury goods and services are invariably increased, sometimes significantly, above the published national rate of inflation. In one sense it could be argued everyone has their own personal rate of inflation.

So Why are After Costs & After Tax Real Total Returns Important?

Answer: planning.

To meet our financial expectations we need to plan. Without it we will surely fail to arrive at where we want to be.

No matter what stage you’re at on your financial journey, you need a sense of what’s ahead. Sensing what lies ahead requires making some assumptions to establish the tasks you need to undertake. That’s where planning and an understanding of the return matrix is crucial.


Figure 4 illustrates the journey of a 32-year-old earning £30,000pa with £10,000 already invested in a tax wrapper. Our 32-year-old wants to know the future value of their pension at age 67. The assumptions: they save 5% of their gross salary and their employer contributes 3% of their salary to their pension for a total monthly contribution of £200, Nominal Total Returns over the period are 7% with an annual inflation rate of 2.5%.

Figure 4: Expected Real Total Returns

Calculator Source: Candid

Under these assumptions our 32-year-old’s pension will be worth £450,974, but it’s actual (aka real) purchasing power after 35 years of 2.5% inflation will only be £247,008. If this scenario is similar to one you face, you’ll have to ask yourself if these outcomes meet your expectations. If not, you will need to take action.

But Wait, You’re Not Done Yet!

The above example fails to take account of the other variable that matters to us, namely costs.

A recent (December 2020) Financial Conduct Authority study stated:

“Taking into account both advice and portfolio charges, customers pay, on average,

1.9% in charges each year.”

The FCA’s figure excludes platform charges, so in Figure 5 below I have added 0.3% to accommodate these additional fees, for a total of 2.2% in annual charges.

Taking the same parameters as Figure 4, Figure 5 shows how the combined impact of inflation and fees impacts our 32-year-old’s pension portfolio.

Figure 5: The Added Impact of Costs

Calculator Source: Candid

The reality is our 32-year-old now only has a portfolio worth £150,666 in real purchasing power after 35 years of hard graft. Inflation and costs have together wiped a whopping 70% off their pension – OUCH!!

Fear Not!

The situation is not as bad as it might at first appear. There are things you can do to minimise the perniciousness of inflation and costs.

You can’t do anything about general inflation, but you might be able to better manage your personal inflation rate by cutting back on luxury expenditures. There are additional ways you can save more without too much extra sacrifice. And there are certainly alternative and more economic ways of managing investment costs.

[FYI: Examples of how to minimise the impact of inflation, save more and reduce investment fees are ongoing themes in each of the three MYFE books.]

Staying on Track

No matter your age or where you’re at on your saving and investment journey, my advice is to review your financial situation once a year. At that time take a snapshot of your current savings and investments, use the above calculators (or similar) to see how you’re progressing, and plan to make adjustments if necessary when you can.


Investment returns can be calculated differently. Make sure you understand the differences and focus on the type that matters most to you when planning to meet your financial expectations.


bottom of page