During an initial consultation, we always ask our clients what their goals are. It can take some time to really work out what they want to achieve in their retirement, and what financial strategies they should use. Often, the first thing new clients say to us is, “I want a good return on my investments.”
But this isn’t really a goal. It’s simply a means to an objective. Getting a good return isn’t useful if the client is not on track to where they want to be in the long term.
It’s easy to simply think in terms of percentages. For example: this year the average return was 8% but I got 10% so I’m ahead of the game. But consider this:
10% of $100,000 is $10,000.
10% of $1 million is $100,000.
There’s a huge difference between the two examples. But they have the same return of 10%. So focusing on the return is not a good goal if the return is on a much smaller capital base.
We like to say ‘you can’t eat a good return’ – meaning that although you might be getting a good return, it is not relevant to how much money you will actually need in your retirement. That is, getting a good return alone is not enough.
When it comes to returns, we always warn our clients to beware of hidden risks. Often, junk bonds have a very high return, and when compared to term deposits (currently at around 1%) they are extremely attractive. These junk bonds often ‘guarantee’ a 6% return on investment. But as we know, there’s no such thing as a free lunch, and that is not a ‘free’ 6% – there are hidden risks that people don’t realise. And most people can’t afford to take such a risk. Market volatility is fine, but you can’t run the risk of losing all your money and ending up with zero if you buy junk bonds. The bottom line is: if it sounds too good to be true, it probably is.
Always be goal-focused rather than focus on getting a good return.
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