Research Articles

The (Un-)Importance of Returns

The following is an abstract. Please contact me to request a copy of the full article.

In my last job with a large investment bank I built two global research teams and worked with high-profile clients around the globe. Having left the big leagues to start my own firm, my clients are more diverse in terms wealth. While I still work with some high-flyers, I mostly work with the mass affluent or millionaire-next-door types (but also some less fortunate families). To convey my previous experience when meeting new prospects, I would sometimes say “I used to work with billionaires, but now I work with millionaires.” Then someone asked me what I did to them.

Humor aside, my experience has helped me understand the varying degrees of desire and need for returns among different types of investors. All else equal, virtually everyone prefers higher rather than lower returns. However, the prudence of pursuing higher returns depends on the financial situation and goals of each individual or organization.

This article focuses on the relevance of returns for four types of investors: those saving for retirement, those with just enough to retire, those likely to leave behind a significant estate (for heirs, charities, etc.), and those with multi-generational goals for substantial wealth. For each investor type, I consider how relevant higher returns are to achieving their goals and the role their preferences may play by potentially imposing additional constraints.

On balance, I find the need or preference for higher returns generally increases with the magnitude of wealth. This is due to two primary factors: an increased capacity to assume risk and the amplification of returns over longer time frames. I discuss the nature of this trend across the wealth spectrum. In the case of substantial wealth, I quantify the need for returns and present a model for analyzing multi-generational investment goals. This provides a sensible and intuitive framework for assessing their investment strategies. My model indicates multigenerational wealth effectively needs to pursue higher returns via higher equity allocations in order to accommodate familial growth and combat inflation.