Investors spend a lot of time and mental bandwidth looking for investment options that give above-average returns. Some even obsess about it. To be fair, there is nothing wrong in that. The problem arises when they invest inadequate amounts and justify it with overconfidence in their own abilities to generate above-average returns.
However, from what little I have learned over the years, you cannot outperform your way out of underinvesting. So while aiming for high returns is one thing, relying on it is another thing. And the latter is where people get it wrong.
It is like focusing on solving an entirely wrong problem. Chasing higher returns feels exciting but the lever that actually moves the needle for your financial goals is not the investment return rate. It is your savings rate. Sounds unglamourous and boring. But there is math to back it.
The math of investing more vs chasing higher returns
Suppose you invest Rs.20,000 monthly for the next 15 years in a comparatively risky instrument which potentially offers high returns of 13-14% per year on average. After 15 years, the expected value of your investment is Rs.1.1-1.2 crore. Now let’s see what happens if you focus on investing more rather than chasing higher returns.
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You invest monthly for the next 15 years in an instrument which gives a lower 11% per year on average. To reach the same corpus size of Rs.1.1-1.2 crore after 15 years, the monthly investment required is Rs.24,000-27,000 approximate. What happens in this scenario is that instead of relying on a risky 13-14% strategy to play out (which may or may not happen), you focus on ‘investing more’ in a comparatively less-risky option giving 11% average annual returns.
In the first scenario, you obsessively chase higher returns, i.e. 13-14%, but invest less at Rs.20,000 per month. In the second scenario, you go for a more predictable average return of 11% but invest a bit more, i.e. Rs.24,000-27,000 monthly.
Unlike higher returns which nobody can guarantee, investing more is something entirely within your control. If you can invest a little more every month, then you will comfortably compensate for the average lower returns.
Different SIP amount & returns scenarios
