Realistic Investment Returns

The Two Goals of Investing

Before discussing returns, clarify your goal:

1. Preserve purchasing power - Keep up with inflation so your money doesn't lose value over time
2. Grow wealth - Beat inflation and actually increase your purchasing power

These require very different return targets.

Understanding Inflation

Inflation is the silent wealth destroyer. If prices rise 3% per year, €10,000 today buys you only €7,400 worth of goods in 10 years.

Historical inflation rates (long-term averages):

• USA - ~3% (Federal Reserve targets 2%)
• Germany/Eurozone - ~2-2.5% (ECB targets 2%)

To simply not lose money in real terms, your investments must at least match these rates.

Nominal vs Real Returns

This distinction is crucial:

• Nominal return - The number you see (e.g., your account grew 8%)
• Real return - What you actually gained after inflation (e.g., 8% - 3% inflation = 5% real)

When someone says "the stock market returns 10%," that's nominal. Your actual wealth growth is lower.

Goal 1: Preserve Purchasing Power

If you just want to maintain what you have (not grow it), you need returns that match inflation.

Target: 2-3% nominal return

How to achieve it:

• High-yield savings accounts - Currently 3-4% in many countries (but varies with interest rates)
• Money market funds - Similar to savings, very low risk
• Government bonds - German Bunds, US Treasuries (short-term)
• Inflation-linked bonds - TIPS (US), inflation-linked Bunds (Germany) - automatically adjust for inflation

Reality check: Don't forget taxes. If you earn 3% and pay 25% tax, your after-tax return is 2.25%. In low-inflation environments (Eurozone's 2% target), this still preserves your purchasing power. In higher-inflation periods, you may need to aim higher.

Goal 2: Grow Wealth

To actually increase your purchasing power over time, you need to beat inflation by a meaningful margin.

Target: 4-7% real return (6-10% nominal)

Historical benchmarks:

The 7% Rule of Thumb

Many financial planners use 7% real return as a long-term assumption for stock portfolios. This is based on:

• S&P 500 historical nominal return (~10%) minus long-term inflation (~3%)
• It's a reasonable expectation, not a guarantee
• Some years you'll get +25%, others -30%
• The 7% only shows up over decades, not years

Note: This 7% figure comes from historical US data. Many institutional investors now use more conservative assumptions (4-5% real) for future planning, due to higher current valuations and uncertainty about whether US outperformance will continue.

Important: This assumes:

• 100% stocks (more bonds = lower expected return)
• Low-cost index funds (high fees eat into returns)
• Staying invested through crashes (selling in panic destroys returns)
• 20+ year time horizon

What Reduces Your Returns

1. Fees

A 1.5% annual fee vs 0.2% makes a huge difference over time. Example: €10,000 invested at 7% for 30 years → with 0.2% fee you'd have ~€72,000, with 1.5% fee only ~€50,000. That's €22,000 lost to fees.

2. Taxes

Capital gains taxes (25-30% in Germany, varies in US) reduce your take-home return.

3. Inflation

Even "good" returns may barely beat inflation in high-inflation periods.

4. Behavior

Studies show the average investor earns 2-3% less than the funds they invest in - because they buy high (greed) and sell low (fear).

Setting Realistic Expectations

• Preserve purchasing power (2-3% nominal) - Savings accounts, money market funds, short-term bonds
• Modest growth (4-5% nominal) - Balanced portfolio (50/50 stocks/bonds)
• Long-term wealth building (7-10% nominal) - Diversified stock index funds, 15+ year horizon

Remember:

• These are long-term averages, not annual guarantees
• Stocks can lose 30-50% during market crashes
• Higher returns require accepting more volatility
• Past performance doesn't guarantee future results

Key Takeaways

• To preserve purchasing power, you need ~2-3% returns (matching inflation)
• To grow wealth, target 7-10% nominal returns (5-7% real) through diversified stocks
• Fees, taxes, and behavior are the biggest return killers
• The 7% rule only works over long time horizons (20+ years) with discipline
• Be realistic: expecting 15%+ annually leads to risky behavior and disappointment

Not financial advice. Always do your own research.

Last updated: February 2026