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Introduction:
Inflation is a critical factor that significantly affects the purchasing power of investments over time. Investors often evaluate the performance of their investments by considering the inflation-adjusted return, which measures the actual income earned after accounting for the impact of inflation. This case study aims to analyze the concept of inflation-adjusted return using a fictional investment scenario.

Case Study:
John, an individual investor, decides to invest $10,000 in a stock market index fund. He plans to hold the investment for five years, anticipating a return of 8% per annum. However, John is aware of the eroding effect of inflation on his investment’s value and seeks to evaluate his actual purchasing power at the end of the investment horizon.

Year 1:
At the end of the first year, John’s investment grows by 8% as expected, resulting in a closing value of $10,800. However, the inflation rate during the year was 3%. To calculate the inflation-adjusted return for this year, John adjusts his investment’s closing value by subtracting the inflation rate. Therefore, the inflation-adjusted return for Year 1 is $10,800 – ($10,800 * 3%) = $10,476.

Year 2:
The investment continues to perform well, and at the end of the second year, John’s portfolio value increases by another 8% to reach $11,664. However, the annual inflation rate rises to 4% in this year. Once again, John calculates the inflation-adjusted return by subtracting the inflation rate from the closing value, resulting in an inflation-adjusted return of $11,664 – ($11,664 * 4%) = $11,195.04.

Year 3:
In the third year, the stock market experiences some volatility, resulting in a negative return of 2%. If you have any kind of inquiries regarding where and just how to use saxafund.org, you could contact us at the web-page. The closing value of John’s investment declines to $11,458.40. Meanwhile, the annual inflation rate remains stable at 4%. John calculates the inflation-adjusted return for Year 3 as $11,458.40 – ($11,458.40 * 4%) = $10,982.94.

Year 4:
The stock market rebounds in the fourth year, generating a return of 12%. John’s investment value surges to $12,873.29. The inflation rate for the year is 2.5%. Therefore, the inflation-adjusted return for Year 4 amounts to $12,873.29 – ($12,873.29 * 2.5%) = $12,548.51.

Year 5:
As the investment approaches its maturity, John eagerly evaluates the final result. The stock market experiences another year of strong growth, and his investment value reaches $13,841.63. However, the inflation rate climbs to 5% in the final year. After adjusting for inflation, John’s investment’s value in real terms amounts to $13,841.63 – ($13,841.63 * 5%) = $13,149.55.

Conclusion:
Through the case study, we can observe the importance of considering the inflation-adjusted return when evaluating the performance of investments. While John’s investment generated a cumulative nominal return of 38.42% over the five-year period, the inflation-adjusted return was $13,149.55, representing a 31.50% real return. This example highlights the need for investors to consider inflation as it directly impacts the purchasing power of their investments. By analyzing inflation-adjusted returns, investors can make informed decisions and set realistic financial goals to preserve and increase their wealth.

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