How do I maximise investment returns?

How do I maximise investment returns?

There are times in life when it pays to be a perfectionist, but building an investment portfolio isn't one of them. Chasing the "perfect investment" is not just futile, it's actively counterproductive. There is no single optimal portfolio. What matters far more is having a portfolio you genuinely understand and will stick with when markets turn volatile.

In this video, behavioural expert and former financial adviser Carl Richards explains why the obsession with perfection is so unhealthy. Perfect, in this case, is the enemy of the good, especially because none of us knows in advance what perfect actually looks like. We're guessing either way. Richards argues that the investment process only matters to the degree that it influences behaviour. If a portfolio isn't the most theoretically efficient thing on the planet, but it helps a client behave better and stay the course, that's good enough.

You'll also learn about one of the biggest challenges investors face: noise. There's always someone making a plausible case for a particular stock, fund or asset class, and tuning it out isn't easy. Richards describes readers agonising over the ultimate emerging markets small-cap fund, a holding representing just three per cent of their portfolio, while they've yet to actually invest their money or fund their retirement account for the year. It's like the patient endlessly debating which blood pressure medication to take, until the doctor points out that he still smokes. Arguing over asset allocation and obsessing about the specific investments underneath is often just a way of avoiding the far more important step: getting started and doing something.

The takeaway: there will always be funds outperforming at any given moment, but the evidence is clear that over the long term you're better off in a low-cost, broadly diversified, passive portfolio. As indexing pioneer Jack Bogle often said, it may not be the best investment strategy ever devised, but the number of strategies that are worse is infinite.

Chapters / Key points

• Why chasing the perfect portfolio is counterproductive
• Why there is no single optimal portfolio
• Why understanding your portfolio matters more than optimising it
• Carl Richards on perfect being the enemy of the good
• Why the investment process only matters if it improves behaviour
• The problem of "noise" and endless plausible investment cases
• Why obsessing over small holdings distracts from bigger decisions
• The doctor and the smoker: focusing on what really matters
• Why a low-cost, broadly diversified, passive portfolio wins long term
• Jack Bogle on why indexing beats an infinite number of worse strategies

Transcript

How do I maximise investment returns?

Robin Powell: Although there are times when it pays to be a perfectionist, aiming for the perfect investment portfolio is counterproductive. There is no single optimal portfolio. It's much more important to have a portfolio that you understand, and that you'll stick with when markets are particularly volatile. Here is the behavioural expert and former financial adviser Carl Richards.

Carl Richards: There's a really unhealthy sort of focus on the perfect, right? I'm going to find the perfect investment, I'm going to build the perfect portfolio. Perfect, really, in this case, is the enemy of the good. Especially because we don't know what perfect is beforehand. We're guessing anyway, so I think the investment process only matters to the degree that it's going to influence behaviour. And so, if we try to optimise for that, like, what's the thing? OK, fine, it may not be exactly the most efficient thing on the planet, but I think it will help solve this client's poor behaviour: that's good enough.

Robin Powell: One of the challenges investors face is what we call "noise." There's always someone making a plausible case for investing in a particular stock, fund or asset class. It's not easy, but you need to try to ignore it.

Carl Richards: I can't tell you how many times clients, or even now, readers, will send in questions like, what's the ultimate emerging markets small-cap fund? Right, and it represents three per cent of their portfolio. In the meantime, you haven't gotten your money invested. Or in the meantime, you didn't fund your retirement account this year. Like the old story of the doctor having a patient continually arguing which high blood pressure medicine to take. And the doctor finally says, hey, wait, you still smoke. You know, so I think that arguing about asset allocation and then focusing on the specific investments underneath, really trying to get perfect, this is the opportunity just to get started and do something.

Robin Powell: Remember, there will always be funds that are outperforming at any one time, but the evidence shows that, in the long term, you're better off with a low-cost, broadly diversified, passive portfolio. As the indexing pioneer Jack Bogle has often said, it may not be the best investment strategy ever devised, but the number of strategies that are worse is infinite.