Rely on ‘invest more’ rather than seeking ‘higher returns’ to reach your financial goals

Investors, in general, aim for high returns; at least higher than what simple instruments (like a bank fixed deposit) would offer. And that is a natural assumption to start with.

When you invest, you are taking a degree of risk for which you look to be compensated by means of higher returns.

However, while you should aim for high returns, do not rely on it. This might sound odd or confusing at first. But bear with me for a bit, and it will be crystal clear.

Let us analyse two scenarios:

Suppose, you start investing Rs 10,000 per month (or Rs 1.2 lakh every year) for the next 15 years. You have chosen a high-risk high-return potential investment that ‘promises’ to give you about 15-16 percent annual returns.

What will be the value of your investments at the end of the 15th year?

The answer is Rs 65-72 lakh.

In this second scenario, you start investing a higher amount of Rs 15,000 monthly (or Rs 1.8 lakh per year). That is, you are ‘investing more’. And you are doing this because you don’t want to rely on very high-risk investments. You pick an instrument that delivers about 11-12 percent annual returns.

What will be the value of your investments at the end of the 15th year?

The answer is Rs 68-75 lakh.

In the first example, you get higher returns (15-16 percent), but invest less (Rs 10,000 per month). In the second example, you get lower returns (11-12 percent), but invest a bit more (Rs 15,000 per month).

Clearly, the second strategy results in the accumulation of a bigger corpus, that too, by earning lesser returns. More importantly, this happens because of the higher savings rate. So, if you save/invest more, then you will comfortably compensate for the lower returns.

But why would you want to earn lesser returns?

That is not what we are trying to say here.

Let’s just change the perspective a bit and you will get the message.

Suppose, you have a goal of accumulating Rs 65-75 lakh in 15 years. You have two options to achieve it. One option is to take higher risks, try to get higher returns and invest a smaller amount. The other is to take lower risks, invest a bit more and not rely on higher returns by taking more risks.

Which is a more prudent option?

The second, of course.

And that is the whole point that we are trying to highlight.

If you want to increase the probability of investment success, don’t rely on high returns as they come with a lot of risks. Instead, focus on investing higher amounts (or the right amounts for your goals). And, let me say this without mincing words – your savings rate will play a bigger role in how large your corpus turns out to be than the returns you generate. This is true, at least in the initial years of your long-term goals.

Sometimes it’s possible that your personal circumstances may not allow you to invest more.

In such a case, should you rely on getting higher returns?

Not being able to invest is a common problem. Sometimes due to circumstances, and at other times, because of ignorance.

But if the surplus available is not enough, then you have got to adopt a balanced approach. First, try to invest as much as possible. Ideally, find out the right Systematic Investment Plan (SIP) amounts to be able to meet your goals, and invest accordingly. But if the surplus isn’t enough to allow investment of the required amounts, and also the goal has a long time horizon, then taking a bit of extra risk can be considered. But this should only be done based on your risk appetite (or if your advisor recommends doing that).

In general, never take unnecessary and non-calibrated risks in order to obtain higher returns. More often than not, it will backfire and put you two steps back.

Remember, the goal of investing, in practical terms, is to help you have sufficient money in your hands when you need it. It’s not about earning very high returns, taking high risks, or beating others or the indices. It’s always about enough money being available at the right time. And when you rely on ‘investing more’ rather than seeking ‘higher returns’, then your chances of being able to accumulate the money for your goals increase dramatically.