Why are investors so obsessed with returns? They are usually motivated by greed and fear — when the markets are going up they are seized by greed and when it is south bound, they are in the cold grip of fear. However, that does not satisfactorily explain why investors are always focusing their energies solely on returns and exclude every other factor while investing.

People chase returns because they believe that it is the only way they can achieve their financial goals. Many actually ask, in all seriousness, if that is not the purpose of investing.

This is, sadly, the wrong approach. The purpose of investing is not just to earn the highest returns but to help one to predictably and easily achieve the various objectives and goals that come up over time. I concede that this does not sound exciting.


Why you should not chase returns

Chasing investment returns would neither achieve the purpose of better portfolio returns nor achievement of goals. This sounds counter intuitive at first glance, but it is not.

Let’s take an example. Aniket is a middle level corporate executive. He does not know much about personal finance but he does read financial dailies and watches business news channels. Like this, he gets to know about what is trending at any given point and he invariably invests his money in what is giving the highest returns at any point. He invested in equities in 2005-2007 when the market was on a high. He also invested in real estate in 2006 when it was red hot. Gold had rallied in 2010 -11 and Aniket did not want to miss out on that opportunity either.
What he has been doing is move money from one asset to another over time. In 2006, he had invested in property, in 2006-2007 he invested in equities and when the market crashed he sold his home in 2010 and all equity holding at the start of 2009. In property, he made some money and lost a lot in equities. After that he invested in fixed deposits (FDs).

Then the irresistible opportunity came in the form of a run up in gold prices. In 2011, he cashed out a portion of the FDs (about one third of the FDs) and invested in gold. Aniket bought gold at Rs 22,000 per 10 grams and sold it in 2015 at around Rs 24,000 as it was not giving good returns (2.2% returns per annum). He now rues his decision as gold has now reached Rs 28,000 levels. Then in 2014, he started investing in equities again!

The hype about timing
There is an Aniket in all of us. All of us want to invest at the right time. But getting the timing right is as elusive as torrential rains in the desert. Ironically, investors get the timing all wrong, most times. It is usually too late by the time the investor realises that the asset price has gone up; they wait in the sidelines for long and get into the market when the asset has had a good run-up. They enter at a high and get disappointed when it starts to plateau and move downhill. After a dizzying downhill ride, they exit. This happens again and again. This is the reason most investors don’t make money as they don’t stay invested and keep churning. The more they try to time the market, the more they lose.
One needs to invest when the asset is least fancied – that’s the way to make money. But investors do exactly the opposite. By regularly moving from one asset to the other, they also incur costs and taxation, which they rarely take into account. They also miss out on the most important aspect of why they are investing.

Simplifying life
We invest to meet our life goals. We need to understand what we need to do to meet life goals. We need to have a blueprint, a plan. Based on all these we need to consider the risk profile of the person, the number of years to retirement, tenure and liquidity needs, taxation etc., and then arrive at the right allocation mix. Getting the asset allocation right is important. Every asset will not perform at every point; but it offers diversification and provides a cushion when one asset under performs. We need to, hence, look at the overall portfolio returns – not individual asset returns and within that scheme-wise returns.

Investment returns are important and will come when invested properly. We have seen that most people can meet all their goals at a modest 9 percent portfolio return. So, investment returns are not what we need to focus on. Disciplined investment, proper asset allocation, and periodic reviews are what are needed to ensure that one’s life is well funded.

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