Return

Different measures

• Nominal return is the return in krónur, without taking inflation into account.
• Real return is the return after inflation has been taken off. If an asset rises 8% a year while inflation is 6%, the real return is about 2%. The same idea lies behind the real interest rateReal interest rateThe interest rate minus inflation. Real interest shows whether savings are really growing in value or shrinking, even as the number of krónur rises..
• Annualised return lets you compare periods of different lengths. A 20% rise over two years is about 9.5% a year.
• Return after tax. Individuals pay 22% capital income tax on interest, dividends and capital gains, so less is left than the headline figure suggests.

Risk and return

The general rule in finance is that a higher expected return comes with higher risk. A bank deposit earns little but doesn't swing at all. Shares and crypto can earn far more, but they can also lose a lot. VolatilityVolatilityHow much and how quickly the price of an asset moves up and down. is often used as a measure of that risk.

Over time, returns can build on themselves, because the return itself starts to earn a return. That is called compound interestCompound interestInterest calculated on interest already earned. The amount grows faster and faster over time, whether it is savings or debt..

Good to know

• Past returns say nothing about the future. That is why most investment material carries a warning about it.
• Promises of high, safe returns are a warning sign. No real investment is both very profitable and risk-free. Such promises are the most common bait in investment scamsInvestment scamA scam that promises big, safe returns on an investment, often in crypto, while the scammers simply take the money paid in..
• Costs matter. Fees and spreads eat into returns, especially if you buy and sell often.