The Hidden Math of Real Returns
Executive takeaways: Nominal gains often mask purchasing-power losses. Evaluate every position in real terms using a simple compass—Yield, Duration, Debasement—and favor scarcity-linked assets (gold, infrastructure, royalties) to preserve and compound true wealth.
I. The Illusion of Prosperity
Nominal charts flatter; purchasing power tells the truth. In high-variance, policy-distorted cycles, leverage and liquidity can hide erosion for years—until inflation reveals whether capital actually compounded. When prices rise 5% and a portfolio rises 7%, it appears to be a “win.” But if true inflation runs closer to 8%, real wealth declined.
Signal: Real wealth isn’t how high the line goes—it’s what your capital still buys when the music stops.
II. The Real Yield Compass
Goldman Rock evaluates every investment on three coordinates:
- Yield — cash/income return (“What I’m paid”).
- Duration — time to liquidity (“When I’m paid”).
- Debasement — inflation + currency loss (“What my payment is worth”).
Rule of Real Compounding: Capital compounds in real terms when Yield > (Debasement × Duration).
III. How Real Assets Protect Real Returns
Real assets—gold, energy, infrastructure—anchor purchasing power because their economics index to scarcity, not policy. When currencies dilute, physical value tends to hold or appreciate. The fewer abstractions between your capital and the real economy, the stronger your real yield.
Investor Implications
- Audit real returns: Evaluate each holding against true inflation and currency drift—not headline CPI.
- Favor scarcity-linked assets: Metals, infrastructure, and resource royalties preserve purchasing power when monetary assets decay.
- Re-price risk in real terms: Replace nominal IRR targets with real IRR hurdles.
- Hedge debasement: Maintain a strategic gold/commodity sleeve (5–15%) as real-return insurance.