High Return is not a goal in itself

In life things are interconnected and what happens in one area can affect others as well. A pool of funds approach is better than investing for various goals, in silos.

As financial advisors, we believe it’s always important to achieve one’s goals than gunning for outsized returns. If you focus on high returns, you may end up taking high risk and may miss on other important parameters like liquidity, tenure, income, taxation etc.

As a rule, higher the return one expects, higher the risk one may have to take.  Also, the holding tenure tends to be higher in such cases.

Return is only one aspect among a list of things that need to be factored before planning for one’s finances.

From a financial planning standpoint, the main purpose behind investing is to create a corpus for any kind of requirement/goal. It may be for emergency requirements, education funding, vacation, or any such goal. In order to achieve your goals, you must choose investment instruments, keeping in view the liquidity needs for the various goals. The time can be as low as a month or as long as a couple of decades.

The most important aspect is asset allocation.  An advisor would put together a portfolio after due consideration of their goals, liquidity, emergency funding needs, tenure, taxation etc.  Risk tolerance & Risk capacity should also be considered before drawing up a portfolio.

A portfolio constructed this way would be positioned to achieve the client’s overall goals & objectives in the most aligned manner possible. That is what everyone truly wants. 

Return optimisation is an overall goal within the framework of such a portfolio. That certainly gets addressed by a good advisor. Return maximisation as an important objective is not something a credible advisor will strive for, as it can impact other critical factors while putting together a portfolio.

For instance, equity investment done with a return maximisation goal may not be suitable to fund one’s daughter’s education coming up in a year.  Equity as an asset works in the long-term and may well be suited for other longer tenure goals. Hence, it can be a part of the overall allocation in the portfolio, with a longer investment horizon, in case of this asset class.

A good portfolio should optimise all aspects which are important for a client. Return optimisation while factoring all other important considerations for the client is desirable.

Return focus in exclusion is dangerous. It leads to sub-optimal results or even total disasters.