share cafe logo  

The Difference Between Desired & Required Returns

We probably all remember during those long difficult car trips as children repeatedly saying such irritating things to our parents as: "When do we get there?". Perhaps adding to reinforce the point, "I knew we would never get there".

And then pleading whenever a fast-food joint appears on the horizon: "I NEED an ice cream".

Fast forward to today and think how we broadly face similar fundamental, yet much more complex, issues regarding our retirement savings.

Astute investors set their long-term goals – the parallel being the destination of those seemingly-endless childhood road trips – and then work out how to get there.

And a critical challenge for investors is to make the often-overlooked distinction between the required returns from their portfolios to reach their intended investment destinations against their desired returns. (This equates to separating between NEEDING that ice cream as a child or merely just wanting one.)

The separation of desired and required returns, ideally at the beginning of the financial planning process, is truly an investment fundamental. Distinguishing between desired and required returns should help guide investors to selecting appropriate asset allocations for their portfolios given their personal circumstances including their unique goals and tolerance to risk.

In other words, the process of separating between returns in this way should assist investors narrow the range of asset allocation choices suitable for them.

An updated Vanguard research paper* – Required or desired returns? That is the question – suggests that many investors will find that the return required to achieve their long-term goals is "meaningfully less" than their desired return.

And, of course, higher returns are associated with higher risks.

The research paper ends with a twist: "Ironically, for many investors the means to a better investment outcome and greater wealth may be a more balanced portfolio with lower expected returns, rather than one focused on higher returns."

*Required or desired returns? That is the question by Vanguard investment analysts Donald Bennyhoff and Colleen Jaconetti.

View More Articles By Robin Bowerman

Robin Bowerman is Head of Market Strategy and Communication, Vanguard Australia. As a renowned market commentator and editor Robin has spent more than two decades writing about all things investment.

Vanguard Investments Australia Ltd (ABN 72 072 881 086 / AFS Licence 227263) is the product issuer. We have not taken yours and your clients' circumstances into account when preparing our website content so it may not be applicable to the particular situation you are considering. You should consider yours and your clients' circumstances and our Product Disclosure Statement (PDS) or Prospectus before making any investment decision. You can access our PDS or Prospectus online or by calling us. This website was prepared in good faith and we accept no liability for any errors or omissions



What are the current opportunities and key risks?

More video   


 › Marcus Today End Of Day Report
 › Friday At The Close
 › Australian Dollar: Everything You MUST Know In 5 Charts
 › Consumers Are Driving China's Economic Growth - And Foreign Investors Have Noticed
 › US Supreme Court Rules States Can Tax Online Sales
 › Tolga & The Boys Await News From The Alderan Front
 › Market At Midday On Friday
 › Birds, Bees And Bugs, Going, Going, Gone
 › Australian Corporate Bond Price Tables
 › Search For Yield & The Ballooning Bond Market
 › As Trade Worries Escalate Investors Are Jumping Into This
 › Next Week At A Glance
 › Overnight: That Will Do For Now
 › FBU - Deutsche Bank rates the stock as Hold
More ShareCafe   


Delivered free to your inbox before the market opens each trading day. Sign up below +