What is the impact of inflation on investments?

Investors need to consider the effects of inflation on the actual return they receive from their investments. Inflation causes the price of goods and services to rise, which can erode the purchasing power of currency over time. When calculating returns on investments, the real return is the nominal return adjusted for inflation. If inflation rates are higher than the nominal returns on an investment, the investor may find that despite earning a profit in terms of nominal dollars, the actual purchasing power of their gains has diminished. Therefore, when inflation is factored in, it can potentially decrease the real return on investments, meaning that investors might not be able to buy as much with their returns as they could before inflation took hold. This understanding is crucial for making informed investment decisions and managing expectations about future income streams from investments.