The Return You Need Matters More Than the Return You Want

Ask an investor what return they would like and the answer is usually simple - as much as possible.

That is perfectly natural. If 7 per cent is good, surely 9 per cent is better. And if 9 per cent is achievable, why settle for less?

The problem is that return does not exist in isolation. Higher expected returns usually come with higher risk, greater volatility, less certainty or some combination of the three.

Which raises a much more useful question:

How much return do you actually need?

That question can completely change the way a portfolio should be built.

More is not always better

Imagine someone has accumulated $5 million and needs $100,000 a year from their portfolio.

That represents 2 per cent of their capital. Now compare that with someone who has $1 million and needs the same $100,000 a year.

They face a very different financial problem.

The first investor may have considerable flexibility. The second may be much more dependent on investment returns to sustain their lifestyle. Yet traditional investment conversations often begin by asking both people the same questions:

"What is your risk profile?"

"How much volatility can you tolerate?"

"Are you a conservative, balanced or growth investor?"

Those questions may have some relevance but they miss something fundamental.

What return does the financial plan actually require?

Required return changes the conversation

If a financial plan can succeed with a relatively modest return, why deliberately take risks that are not required?

That does not mean avoiding growth assets.

Inflation matters.

Longevity matters.

A portfolio may need to support spending for decades but there is a difference between taking enough investment risk to meet a genuine financial objective and simply taking more risk because a higher return sounds attractive.

That distinction becomes increasingly important as wealth grows.

At some point, the question may no longer be:

How do we maximise wealth?

It may become:

How do we protect the life this wealth already makes possible?

Risk should have a purpose

Every additional unit of investment risk should have a reason behind it.

Perhaps the client needs long-term capital growth.

Perhaps inflation is the greater threat.

Perhaps the investment horizon is 20 or 30 years.

Perhaps the client is still accumulating and can tolerate significant short-term fluctuations.

All of those can justify meaningful exposure to growth assets but taking risk simply because markets have historically rewarded it is not enough.

Risk should serve the financial plan. The financial plan should not be distorted to serve the pursuit of return.

A 10 per cent return can still be a poor outcome

Investment performance is seductive because it is easy to measure.

If one portfolio earns 10 per cent and another earns 7 per cent, the first looks better but that conclusion can be misleading.

What if the 10 per cent portfolio required far more concentration?

What if it was less liquid?

What if it exposed the investor to losses they could not comfortably withstand?

What if the investor needed to sell during a market downturn?

What if the volatility caused them to abandon the strategy at exactly the wrong time?

A higher return is only better if the investor can live with the risks required to achieve it.

The role of the financial plan

This is where financial planning should lead investment strategy.

A good financial plan should help answer questions such as:

How much does the client need to spend?

How much capital is available?

How long does the money need to last?

What future liabilities are known?

What cash reserves are required?

What level of return gives the plan a reasonable chance of succeeding?

Once those questions are understood, the portfolio can be designed around them.

Without that context, investment risk can become almost arbitrary.

The problem with chasing maximum return

The pursuit of maximum return creates another behavioural problem.

There will always be something performing better.

A different fund.

A different market.

A different asset class.

A different strategy.

If the objective is simply to maximise returns, there is never really a point at which the investor can say:

This is enough.

The benchmark constantly moves.

That can create endless dissatisfaction.

A portfolio earning 8 per cent looks disappointing when another fund earns 12.

A fund earning 12 looks disappointing when a technology stock rises 40.

There is always something better in hindsight.

That is not a particularly healthy foundation for long-term investing.

Enough is a powerful concept

Financial planning eventually has to confront a question that investment markets rarely ask.

What is enough?

Enough income.

Enough capital.

Enough growth.

Enough security.

Once we understand that, investing can become far more rational.

The objective shifts from maximising everything to making sure the financial plan remains resilient.

That may mean accepting that we will not own every winner.

It may mean maintaining cash when markets are rising.

It may mean holding defensive assets that temporarily underperform.

It may mean declining an investment opportunity that could produce a higher return but introduces risks the client does not need.

That is not being overly cautious.

It is recognising that investment returns are a means to an end.

Once you have enough, the objective can change

During the accumulation phase of life, growth often matters enormously.

There may be decades ahead in which capital needs to compound but as someone approaches or enters retirement, the purpose of money can begin to change.

The goal may increasingly become maintaining lifestyle, preserving flexibility and ensuring the money remains available when required.

That does not necessarily mean becoming conservative.

It means recognising that the portfolio has a different job to do.

The investment strategy should evolve with that job.

The question we prefer to ask

At TUI, we think a better investment conversation begins with:

What does your financial plan require?

From there we can consider the return required, the risks involved, the liquidity needed and the investment structure most likely to support the plan.

That is far more useful than simply trying to achieve the highest return possible because the best investment outcome is not necessarily the portfolio that earns the most.

It is the portfolio that does what you need it to do.

And sometimes, once you have enough, taking more risk simply because you can is not investing with greater sophistication. It is just taking more risk.