In a world of inflation, returns are not as they seem. Obviously if you get a 3% return after tax when inflation for the period was 3.1%, you've lost a bit of your spending power. But how much?

Actually, it isn't quite as simple as saying that your real return equals the nominal return minus the rate of inflation (-0.1% in the above example), there is in fact a simple formula that you need to use.

The Fisher Relation, named after Irving Fisher, former Yale finance professor is as follows:

      (1+n) = (1+r)(1+i)

Where n is the nominal return, r is the real return and i is the rate of inflation.

So if you expected inflation to run at an average of 3%pa and you want to grow your wealth in real terms by 5%pa, you'd need a return of (1+5%)(1+3%)=1.0815. This translates to a required nominal return of 8.15%pa, not 8% which is what you might assume it should be.