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system
why adjust for inflation annually, as opposed to realising it after the holding period?
user
i would use neither method.  taking a short example first, with just three compounding periods, with interest rate 10%.  the start value y0 is 1. so after three years the value is 1.331, the same as y0 (1 + 0.1)^3. depreciating (like inflation) by 10% (to demonstrate) gets us back to y0 = 1 appreciating and depreciating by 10% cancels out: appreciating by 10% interest and depreciating by 3% inflation: this is the same as y0 (1 + 0.1)^3 (1 + 0.03)^-3 = 1.21805 so for 50 years the result is y0 (1 + 0.1)^50 (1 + 0.03)^-50 = 26.7777 note you can of course use subtraction but the not using the inflation figure directly.  e.g. (edit: this appears to be the fisher equation.) 2nd note further to comments, here is a chart to illustrate how much the relative performance improves when inflation is accounted for.  the first fund's return is 6% and the second fund's return varies from 3% to 6%.  inflation is 3%.
assistant