I often see new investors chasing returns from their investments, either taking on more risk than they are comfortable with, or not getting good returns for the level of risk they are taking on.
I think there is too much focus on returns.
How much someone ends up with in their investment accounts is a combination of two things:
1/. Investment returns
2/. How much money you invest
In the beginning, how much you invest is far more important than investment returns
If you are starting off, then far and away the most important thing is how much you invest. Not the returns.
In the grand scheme of things, returns don’t matter as much until your account balances grow much higher or as you are approaching retirement.
Let’s illustrate with an example.
Helen is 25 years old. She is investing $500 a month into a well-diversified portfolio and is earning returns of 4% (after fees and tax).
Investment returns over 10 years at 4% interest rate
After 10 years of investing she has contributed $60,000 of her own money, and received $14,918 in investment returns. 80% has come from Helen’s own pocket.
Let’s increase the returns to 5% and see what happens:
Investment returns over 10 years at 5% interest rate
$19,241 in investment returns now. But still, 76% has come from Helen despite a 1% better return! Doesn’t seem like much.
In fact, the extra $4,323 in returns received over the 10 year period could have just as easily been achieved by investing an extra $29 per month.
So instead of chasing an extra 1% return, could it be easier to find an extra $29 a month? One less coffee a week? Two less lunches out a month? Shop around for a cheaper internet or phone deal?
The point is, I find there is far too much focus on returns at the wrong end of the investment timeline.
Returns are extremely important when your investment balance grows. Let’s fast forward 10 years to years 20 to 30.
Investment returns over 30 years
Helen has now received investment returns of $169,970. 51% of her final balance is from her own investments and 49% from investment returns.
This is far greater than the 80%/20% in the first 10 years and shows the stark difference. Returns are now much more important to the overall health of Helen’s portfolio.
Final Thoughts
I just wanted to bring this up to remind you that the best thing you can do as a new investor is to focus on ways to increase your own contributions, and not rely on returns, nor be scared of poor returns.
If you have a bad year in the markets, then it is just a tiny blip in the scheme of things. Make it up by cutting back some costs and investing more.
You will make a far greater impact on your portfolio by increasing your input, than you will by trying to get a slightly better return.
Or even better, do both.
High returns on sweet F all is sweet F all.
You can run your own numbers on this free personalised investment returns vs contributions spreadsheet.
If you need an investment plan or recommendations , then get in touch today.
The information contained on this site is the opinion of the individual author(s) based on their personal opinions, observation, research, and years of experience. The information offered by this website is general education only and is not meant to be taken as individualised financial advice, legal advice, tax advice, or any other kind of advice. You can read more of my disclaimer here