Why High Returns Alone Should Not Be The Goal

“Earn the highest returns” is how the goal of investing is often defined. But if you step back to reconsider, you will realize high returns themselves are not the end; they are just a means to achieving your financial goals.

You will also notice that other factors are as important or even more so than earning high returns:

• Peace of Mind
• Your Time
• Liquidity

Peace of Mind

Doesn’t matter the returns you are earning, if you’re losing sleep over your investments, you are taking a much higher risk than your appetite. To have peace of mind, it’s important to keep risk at a comfortable level.

But as the legendary investor Howard Marks points out, it’s very difficult to accurately measure investment risk, even after the fact; even the famous Sharpe Ratio can’t gauge all potential risks.

However, one can safely presume that higher returns come with higher risk. Fortunately, you don’t need to chase high returns. You can meet your goals with lower returns — by investing a larger principal amount.

As your required rate of return goes down, you can afford to lower the portfolio risk: allocate more to safer investments and less to riskier ones. This will cushion your portfolio from the blows of market ups-and-downs, and help you sleep better.

Increasing your investment base will also increase the likelihood of success, as unlike returns, it is entirely within your control. It is also not as hard to increase as it may seem.

Time

No matter how rich you become, you will always have limited time. If generating high returns requires your constant attention, you will have less time for every other activity in life, like spending time with family and friends.

Being a time blackhole is one of the biggest reasons I am against active trading. Even if you consistently beat the market, doing so will likely soak up all your free time and mental bandwidth.

Recently, I was exploring capital-efficient investing to increase returns on our retirement corpus. Unfortunately, unlike the US, there are no capital-efficient funds in India, yet. As a result, implementing it here requires some manual effort.

When I discussed this idea with my wife, she expressed her unequivocal reservation: “with a kid on the way, we should be spending less time managing our investments, not more. Our existing investments can already help us achieve our goals. We don’t need the higher returns. Especially not at the cost of spending more time and energy managing the money.”

That was hard to counter.

Liquidity

It does not matter how much money you have, if you can’t access it when you need it, what’s the point?

Investment products such as NPS, EPF and PPF offer good after-tax returns but have long lock-in periods and stringent restrictions regarding when and how much money one can withdraw. The redemption process is not seamless either.

I understand why the government has structured these instruments aimed at the masses this way. I am not completely averse to investments that require a lock-in but multi-decade lock-ins are a deal-breaker for me.

As a result, I do not invest in NPS. I can approximate similar returns through easily accessible index funds and debt funds, which can be sold for cash whenever I want. I cannot opt out of EPF, however, I intend to withdraw all that I can for the downpayment of our home when we buy one.

By not investing in these products, I do lose some tax benefits. But I would rather earn slightly lower returns but keep complete control of my money.

Earlier, I used to look at only the expected returns of investments but now I keep these factors in mind when I consider new investment avenues. Hope these help you too in your evaluation process!