Chasing Returns: Why Bigger Isn’t Always Better

Every so often, someone sits down with me and says, “My brother-in-law had a great year—why isn’t my portfolio doing the same thing?”

I understand. Big returns are hard to ignore.

But what I’ve seen play out over 15 years of working with people close to retirement is that chasing those returns often backfires, and the math explains why.

In my latest video, I walk through how a 20% average return can actually leave you with less money than a steady 8%. If you watch it, I think it will change how you think about risk.

If you have questions about your retirement, book your free 15-minute consultation to get a personalized look at your retirement strategy.

Transcript

Here’s something most people don’t want to hear: a 20% return can actually leave you with less money than an 8% return. I know that sounds wrong, but stick with me because the math is pretty eye-opening.

Retirement Investing: Why Chasing High Returns Can Be Risky

Hi, I’m Joe Dowdall from Worth Asset Management, and I visit with lots of people here in Texas. And you know, they say everything is bigger in Texas. Well, some people want to believe that applies to investment returns too. But chasing big returns can be one of the biggest mistakes people make as they near retirement.

A Simple Investment Example: Steady Returns vs. Aggressive Returns

Let’s say we have two hypothetical investors, we’ll call them Carol and Dave, and they both start with a $100,000 initial investment. Now, Carol takes a steady approach, targets 8% return, and remains diversified. Dave, on the other hand, he’s much more aggressive, and he’s going to target a 20% return.

And after Year 1, Carol has her 8%, so she now has $108,000. But Dave makes 60%, so his $100,000 is now $160,000. And at this point, he looks like an absolute genius. And, frankly, the numbers back him up.

How Investment Losses Can Quickly Reverse Big Gains

But then Year 2 arrives. Carol earns another 8% with her steady diversified approach. So her account value is just over $116,000. But Dave’s portfolio drops by a third—that’s 33%—and this is a huge mistake.

Now, Dave will say, “Well, I made 60% in Year 1. I lost a third of that in Year 2, so I must be averaging 20% per year.” This would be correct math, but, unfortunately, his account value does not reflect that. Dave is forgetting about sequence of return risk.

Understanding Sequence of Returns Risk in Retirement Planning

And for after one year, his $160,000 portfolio value, which then drops by a third, is now worth less than $108,000. So that means Carol’s steady diversified approach, not nearly as exciting, is actually ahead by almost $10,000.

Why Investment Losses Are Harder to Recover From

Now, you may think so, but the math here is not a trick. Losses are harder to recover from than most people realize. Look at it this way: if you lost 50% of your account balance, you may think you need to make 50% to get back. But the math says you’d actually have to make 100% just to get back to where you started from.

Diversification and Portfolio Recovery After Market Losses

Now, we saw this play out in real life back in 2022. In that year, the NASDAQ was down 33%. It would have taken a return of around 50% just to get back to where you started from.

Meanwhile, if you’re in a diversified rebalanced portfolio, maybe you’re only down 10%, which is still not great, but that would only take an 11% return to get out of. That’s a very different hole to climb out of.

Why Market Volatility Matters More Near Retirement

And over a lifetime of investing, these losses can add up in a major way. Now, if you’re in your 30s, you can wait out a big drop. But if you’re five or 10 years from retirement, taking on a big loss at that point can be catastrophic. It can force you to push your retirement date back years. Or maybe you’ll have to take money out of a portfolio that has not had a chance to recover.

Why Portfolio Stability Matters More Than Big Returns

Taking on a big loss at the wrong time can be dramatic. A high number on a piece of paper is meaningless if your portfolio falls apart when markets drop. And they will drop.

What matters is having a portfolio that can withstand the volatility that we’ve seen historically and we can assume will happen again.

A Systematic Investment Approach to Managing Downside Risk

At Worth Asset Management, we follow a systematic investment approach that’s designed to manage downside risk. When something in our portfolio underperforms, we don’t just reduce it, we remove it altogether, at least until it can show renewed strength.

Now, that type of discipline isn’t exciting to talk about, but it’s what keeps us from digging a hole that’s too big to climb out of.

Retirement Portfolio Review: Is Your Portfolio Built to Last?

Are you approaching retirement and wondering if your portfolio is built to last? Well, let’s talk. 

You can call me at 469-423-1989 or email me at joe@worthassetmgmt.com.

Thank you for watching. Be safe out there.