Chasing High Returns
When it comes to investing, everyone desires high returns. It's natural to want your money to grow quickly, steadily, and substantially. However, the pursuit of high returns can sometimes lead to harmful financial decisions. While higher returns are appealing, they come with increased risk and potential downsides that investors need to consider.
Increased Risk Exposure
Chasing high returns almost always involves taking on more risk. This is particularly true in the public markets (like the stock and bond markets). Investments offering the potential for outsized gains often carry a higher probability of significant losses. Investors may find themselves drawn to speculative assets or volatile markets in pursuit of these high returns. Over time, this increased exposure to risk can jeopardize the long-term financial security of an investor. Why? Well, read on….
Emotional Stress
The quest for high returns can lead to emotional stress and anxiety. Volatile investments can cause sleepless nights, constant monitoring, and emotional decision-making. The psychological toll of constantly chasing high returns can be detrimental to one's overall well-being. Investors may experience heightened levels of stress, leading to impaired decision-making and emotional exhaustion. It is this emotional stress that can undermine discipline and cause us to make poor decisions.
Neglecting Proper Asset Allocation
A singular focus on high returns may cause investors to neglect a well-diversified portfolio. A balanced approach to asset allocation is vital for managing risk and achieving long-term financial goals. By fixating on high returns, investors may overlook the importance of spreading their investments across different asset classes, thus exposing themselves to unnecessary risk.
Short-Term Focus
Chasing high returns often leads to a short-term investment outlook. This can result in frequent trading, market timing, and a lack of patience. Successful investing is a long-term endeavor, and continually pursuing high returns may cause investors to lose sight of their financial objectives. Long-term financial planning may take a back seat as individuals focus solely on immediate results. That’s not to say you shouldn’t have any fun with your money if you enjoy trading, just don’t make it a large enough amount that losing it could ruin your life’s plans.
Overlooking Fundamentals
In the pursuit of high returns, investors can overlook the fundamental principles of investing. Proper due diligence, analysis of financial performance, and assessment of investment quality can be overshadowed by the allure of the potential for quick profits. Neglecting these fundamental aspects of investing can lead to poor decision-making and overlooked red flags.
The desire for high returns is understandable, but the harm caused by chasing them can be significant. Increased risk exposure, emotional stress, neglect of proper asset allocation, a short-term focus, and overlooking fundamentals are all potential consequences of prioritizing high returns above all else.
Instead, investors should focus on a well-structured, diversified approach to investing that aligns with their long-term financial goals and risk tolerance. By doing so, they can help ensure a more stable and sustainable path to financial success. And have some fun in a trading account that doesn’t impact your main portfolio!