Is your portfolio actually growing? The two measures that tell the truth
A 10% gain sounds good — until inflation was 7% and gold rose 12%. Two honest checks beyond the number on your app.
TL;DR — A 10 percent gain sounds good until you realize inflation was 7 percent. And if you measure in gold, you might have actually lost ground. The number on your brokerage app is not the full picture. Here are the two checks that tell you whether you are genuinely getting wealthier.
Your brokerage app shows you a number. It goes up and you feel good. It goes down and you feel bad. But that number is expressed in your local currency, which itself is losing value every year. A portfolio that grows 5 percent in a year when inflation runs at 6 percent has made you poorer, not richer.
There are two honest measures of whether your portfolio is actually growing.
Measure 1: Real return (subtract inflation). Take the percentage gain your portfolio made this year. Subtract the inflation rate in your local currency. What is left is your real return, meaning how much more you can actually buy.
If your portfolio grew 9 percent and inflation was 5 percent, your real return is roughly 4 percent. You can buy about 4 percent more goods and services than last year. If your portfolio grew 4 percent and inflation was 6 percent, your real return is roughly negative 2 percent. You are getting poorer despite the rising number on your screen.
This is the first honest check. It matters because your rent, food, energy, and healthcare all inflate. The relevant question is not whether your portfolio number went up. It is whether it went up faster than the cost of living.
Measure 2: Gold-denominated return. Gold is the most useful international reference point because it belongs to no monetary system. No government can print more of it. Its purchasing power has been remarkably stable over very long periods of time.
To calculate your gold-denominated return: divide your portfolio value by the current gold price (in your currency). Do the same with last year's value. Compare. If your portfolio rose 10 percent but gold rose 20 percent, your portfolio lost ground in terms of real purchasing power. You can buy less gold than you could a year ago.
This is not about whether you should hold gold. It is about using gold as a ruler that does not bend.
Why does this matter for beginners? Because it reveals the difference between nominal gains (the number went up) and real wealth accumulation (you can actually buy more). Many portfolios look good on paper but are simply keeping up with, or lagging, the debasement of the currency they are measured in.
Example — A French investor starts 2022 with 100,000 euros in a standard portfolio. By end of year: 95,000 euros (nominal minus 5 percent). Euro inflation was 8.5 percent that year. Real return: approximately minus 13.5 percent. Gold in euros rose about 5 percent. Gold-denominated return: approximately minus 10 percent. The nominal number was bad. The real picture was worse. Both of these measures are more honest than the -5 percent headline number.