Why you need to stop chasing investment returns

Save articles for later

Add articles to your saved list and come back to them any time.

“If I had $10,000 to invest, what would be the best way to get a 10 per cent return in 90 days?”

This is the exact question I once got asked by a beginner investor, and by then, I’d had numerous variations of this question asked many times.

It’s a common question. Everyone wants to know: “What investment will give me X return in Y time period?”

Everyone is constantly searching for the magic formula, but in reality investing is more of a marathon than a sprint.Credit: Simon Letch.

What is the silver bullet? The magic formula? Give me the answer, so I can close my eyes, invest and get a guaranteed return, in a reasonably short period of time. After all, isn’t that what investing is for?

You hear investment gurus bragging about how they made such-and-such returns within such-and-such a time frame, so naturally you think if you could just find that hidden treasure, you too will be able to replicate those results, right?

Sadly, that’s not exactly how it works. Here’s why.

1) Investing isn’t a get-rich-quick scheme. As soon as someone asks about the kind of returns they can get within a few months, I already know they have some fundamental gaps in their understanding of investing.

It might sound glaringly obvious, but good investors make better investment decisions than bad investors, which leads to better returns.

I don’t blame them. If you go by movies, TV shows or the media, it’s easy to assume that successful investing means getting massive, life-changing returns as quickly as possible.

But what you see in the movies is akin to race car driving. It depicts a very specific use case for a very specific kind of vehicle, that only applies to a tiny fraction of professionals.

For the rest of us, driving a car every day is kind of boring. It’s only a means of getting from point A to point B. It’s the same thing with investing.

The high-speed, high-return, high-risk investing you see in movies, isn’t even really investing. Usually, it’s trading or speculating, where people are trying to make a quick buck.

In reality, investing is a long-term game. It’s more of a marathon than a sprint. Usually, the longer you can keep your money invested, the better.

Look at billionaire investor Warren Buffett. Even though he started investing at 11 years old, he accumulated a significant portion of his wealth after the age of 50.

This is because time is like magic dust that can superpower the growth of investments. So, when it comes to investing, patience isn’t just a virtue, it’s financially rewarding.

2) Returns can’t be guaranteed or predicted. It’s not possible for anyone to guarantee that a specific investment will give you a specific return in a specific time period.

They can give you a historical view of how the investment has performed previously (which always comes with the disclaimer that past returns do not guarantee future returns).

Now, there are some benchmarks. For example, depending on the study you look at, on average, over the long-term, historical sharemarket returns sit roughly between 8 to 10 per cent.

However, this does not mean that if you invest in the sharemarket, you can automatically expect 8 to 10 per cent returns over the long term because there are so many variables.

Which specific investment products did you buy? How long did you hold them? What is the overall mix of your total portfolio? How much did you pay in fees and taxes? All those variables will impact your overall investment return.

What happens when you try to control something that is fundamentally out of your control? It inevitably creates stress, anxiety, disappointment, and frustration. All of which, ironically, will likely lead to poor decision-making.

So, how are you supposed to invest successfully, if the outcome is outside your control? Well, this brings me to the last point.

3) Investing isn’t an outcome, it’s a process. The only way to ensure better investment returns is by focusing on the one thing you can control which is becoming a better investor.

It might sound glaringly obvious, but the truth is that good investors make better investment decisions than bad investors, which inevitably leads to better returns.

Returns are a result. They are the outcome of investment decisions.

In fact, two people can buy the same investment and yet end up with entirely different returns because they made different decisions about that investment.

One could have decided to stay invested longer or used a platform that had lower fees, reinvested their dividends, or used a tax structure that offered certain tax advantages.

Successful investors are not successful because their investments make them successful. They’re successful because of their ability to invest.

So, instead of asking “What investment will give me X return in Y period of time?” start asking “How can I become a better investor? How can I improve my skills, confidence, and decision-making abilities as an investor?”

If you do that, you will inevitably improve your odds of getting better returns over time.

Paridhi Jain is the founder of SkilledSmart, which helps adults learn to manage, save and invest their money through financial education courses and classes.

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

For expert tips on how to save, invest and make the most of your money, delivered to your inbox every Sunday, sign up for our Real Money newsletter here.

Most Viewed in Money

From our partners

Source: Read Full Article