The Sufficiency of Returns

Disclaimer: Please note that all content and information in this blog are for educational and informational purposes only and should not be taken as professional investment advice.

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Oftentimes, investors always aim to maximise their returns. But to maximise returns, one has to take on more risk. 

The returns do not come "free" as many believe but comes at a price (risk). The higher the return, the higher the risk. As such, instead of aiming to maximise returns, investors should aim to achieve sufficient returns that meet their needs.

The point of sufficiency is where one's satisfaction (or utility) from the investment is maximised, and that's where investors should aim to reach. 

Beyond the point of sufficiency, any additional return will lower our overall utility.

While the returns may be higher on paper, the additional risk taken outweighs the additional marginal returns achieved. Therefore, maximising one's investing risk-to-reward ratio is a better goal than simply aiming to maximise returns.

Factoring in an investor's risk-aversion level at the point of maximum risk-to-reward ratio is where one's satisfaction from investing is maximised. Any additional return would result in diminishing utility which is not desirable. 

Thus, before deciding on your investment goals, it's important to ask yourself what's your level of risk tolerance and more importantly, what level of returns is sufficient for you? 

Striking a balance between your risk tolerance and the returns that are sufficient to meet your needs will yield the greatest satisfaction and utility from investing. 

Maximising returns often comes at the expense of one's time, energy and resources to monitor the markets and act swiftly to exploit investment opportunities to maximise returns. In this way, the utility and satisfaction derived from your investments is maximised.

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Disclaimer:
The content and information provided on this blog is solely for educational and informational purposes, and should not be construed as financial advice. The accuracy or completeness of the content and information provided in the blog cannot be guaranteed. Before making any investment decisions, it is important for readers to research and carry out independent verification of the information provided, or consult with a qualified financial professional. No warranty and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of actions taken based on the ideas or information found in this blog.

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